Bernanke issues warning to China

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Published: November 19,2010

Tags: Federal Reserve

WASHINGTON — Federal Reserve Chairman Ben Bernanke issued a stern warning to China, saying that it and other emerging nations are putting the global economy at risk by keeping their currencies artificially low.

The Fed chief made the remarks Friday during his speech to a conference at the European Central Bank in Frankfurt, Germany.

“Insufficiently supportive policies” in the United States and other advanced economies could “undermine the recovery not only in those economies but for the world as a whole,” Bernanke warned.

Because countries are recovering from the severe global recession at different speeds, tensions among nations have risen, making it harder to find global solutions to global problems, Bernanke said. So-called emerging countries like China, Brazil and India are growing at much faster rates than “advanced” economies like the United States, Japan and Britain.

By contrast, China and other emerging economies face the challenge of keeping growth robust, without igniting inflation, he said. By keeping their currencies artificially weak, China and other emerging economies are causing problems for themselves and for the stability of the world economy, Bernanke said.

His comments come days after a U.S. congressional report called on Washington to do more to force China to increase the value of its currency. On Friday, the Chinese Foreign Ministry countered that that constitutes interference in Beijing’s internal affairs and accused the U.S.-China Economic and Security Review Commission of having a “Cold War mentality” and of harboring a grudge against China.

At a summit of world leaders in South Korea last week, China, Germany, Brazil and other countries complained that the Fed’s plan would give U.S. exporters a competitive price edge by flooding world markets with dollars. A weaker dollar makes U.S. goods more attractive to foreign buyers.

Emerging economies like Thailand and Indonesia also fear that falling Treasury yields will send money flooding their way in search of higher returns. Such emerging markets could be left vulnerable to a crash if investors later decide to pull out and move their money elsewhere.

Bernanke has sought to defuse criticism of the Fed’s $600 billion bond-purchase plan by arguing that it’s needed to boost the U.S. economy and reduce unemployment. But he warned that the Fed’s program can’t succeed on its own.

“There are limits to what can be achieved by the central bank alone,” he said.

Without more stimulus, high unemployment in the U.S. could persist for years, he said.

Bernanke warned the economic risks are high if Congress doesn’t work alongside the Fed to stimulate the economy.

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