China should allow more flexibility in exchange rate: US

Asserting that the Chinese currency is undervalued and has been used to promote a more export-oriented economy, a top Obama administration official has said that China needs to allow more flexibility in its exchange rate.

Appearing before a Congressional Committee on Wednesday, Federal Reserve Board Chairman Ben Bernanke agreed with US law makers that China's currency policies contribute to harmful global imbalances and was one of the causes of the worldwide recession.

"Yes, I broadly agree with that," Bernanke said when asked a question in this regard by Senator Charles Schumer. "I think most economists agree that their currency is undervalued and has been used to promote a more export-oriented economy," he said.

"I think it would be good for the Chinese to allow more flexibility in their exchange rate. It would give them more autonomy in their monetary policy so they could address inflation and bubbles within their own economy," Bernanke asserted.

"I think that it would be in their interests also to combine a more flexible exchange rate with other efforts to increase domestic demand, domestic consumption and achieve a more balanced economy," he said.

Earlier, Senator Schumer said that China's policy of keeping its currency pegged to the US dollar helps to perpetrate the imbalances in the global economy by subsidising even more Chinese exports at the cost of increasing American exports.

"It makes us too much of a consumption country and China too much of an exporting country and not enough of a consumption country. This has a direct impact on American jobs now. Just about everyone I speak to admits that that's the case," he said.

"So, if China appreciated its currency and moved to the free-floating exchange rate, it would do more for jobs here in the US than any single stimulus programme we could pass into law," the Senator said.

In response to another question, Bernanke said he does not know what share of imbalances can be attributed to the exchange rate and how much to just the other policies that lead to an imbalance of domestic versus foreign demand. "But it clearly is a contributing factor," he argued.

"We hear of our manufacturers saying they cannot compete. I've been to manufacturers in upstate New York that make great products. They're selling them in China. The Chinese are now copying their products, not letting them sell in China anymore... But then are going to sell them here," Schumer said.

"This firm is worried it's going to go out of business. I hear this story over and over again. It's a high-end product. It's a ceramic that deals with pollution in coal-producing electricity plants," he said.