American shoppers will pay higher prices but the U.S. trade deficit with the rest of the world won't fall if China revalues its yuan currency as the Bush administration wants, Federal Reserve Chairman Alan Greenspan said on Friday.
Answering questions after addressing the Economic Club of New York, Greenspan said there was little doubt China will let its yuan currency appreciate against the dollar since it is also under internal pressure to do so.
U.S. manufacturers and lawmakers say China's current policy of pegging the value of its yuan, also known as the renminbi, at about 8.28 to the dollar has let it unfairly pile up trade surpluses by flooding U.S. markets with cheap goods.
But Greenspan poured cold water on the idea that a revaluation will shrink a record bilateral deficit with China that hit $162 billion last year. It will mean that suppliers will turn to other countries like Malaysia or Thailand for cheap textiles and other goods that China now supplies.
"So essentially what we will find is we are importing from a different area but we'll be importing the same goods," Greenspan said. "The effect will be a rise in domestic prices in the United States and as a consequence of that, we will have other impacts which I could trace through but I've fortunately run out of time in this question."
Private-sector analysts have suggested that a possible impact is higher U.S. interest rates if, as a result of a yuan revaluation, China buys fewer U.S. Treasury securities than it now must do in order to keep the yuan pegged to the dollar.
Pressure mounting
The U.S. Treasury, facing intense Congressional pressure, this week told China that if it doesn't revalue within months it will be named as a manipulative trade partner -- effectively threatening Beijing with retaliation. Lawmakers already want to impose hefty tariffs on Chinese imports.
Greenspan acknowledged that China needs to amend its exchange-rate policies for its own good. In order to maintain the peg without sparking inflation, China must "sterilize" the large amount of reserves it amasses in the process of buying U.S. dollars and issuing yuan-denominated debt.
"The trouble with the sterilization issue is that they're only able to sterilize about half of what they are accumulating," Greenspan said, which has the effect of leaving its financial system awash in cash that can fuel inflation.
Greenspan's speech topic to the heavyweight Economic Club ostensibly was energy policy, but not a single question after his address dealt with energy as the Wall Street luminaries who led the questioning zeroed in on their preferred issues.
Greenspan acknowledged that he saw a lot of "froth" in housing markets but held to his view that there was no general economic threat from a potential collapse in housing prices.
Wary eye on housing
"We don't perceive that there is a national bubble but it's hard not to see ... that there are a lot of local bubbles," he said.
The Fed's policy in sharply cutting U.S. interest rates from 2001 to 2004 to 46-year lows -- before initiating a round of rate rises in June last year that continues -- was criticized by some analysts as having sown the seeds for a potential nation-wide bubble as house prices soared.
Since last June, the Fed has lifted its trend-setting federal funds rate from 1 percent to a current 3 percent in search of a hard-to-define "neutral" rate that neither fosters inflation nor crimps expansion.
Greenspan dodged a question about where the neutral rate is, calling it an "amorphous" concept. "Essentially you get down to the point that we will not know it until we're actually there. Maybe we'll miss it -- it's conceivable."
In his formal remarks, Greenspan said energy markets were responding as he predicted in April when he said higher prices would soften demand and lead to inventory-building and that likely will continue in coming months.
U.S. crude oil inventories are near a six-year high, according to a government report issued this week.
"A somewhat lesser, but still important, accumulation of crude oil is evident in other major countries," Greenspan said. "Inventory accumulation is likely to continue unless demand rises, output declines, or we run out of storage capacity."
Greenspan said China and other emerging Asian countries were trying to become more energy efficient, but they lag Western nations, and to some extent may offset conservation efforts elsewhere.
"China consumes roughly twice as much oil per dollar of GDP (gross domestic product) as the United States and if, as projected, its share of world oil consumption continues to increase, the average improvements in world oil intensity will be less pronounced than the improvements in individual countries viewed separately would suggest," he said.