Yuan Float Pose Threat To World Economy: Greenspan - March 2, 2004

Herein lies the rub. The free floaters want the yuan floated but the Chairman of the Fed has the same point I have. The danger in floating the yaun too early without the necessary banking and exchange precations in place could place grave harm on the global economy. Macroeconomics is not as simple as "The Washington Consensus" would have us think. At least one of their own is willing to point out the truth. I commend Mr. Greenspan for his candor.

Yuan float pose threat to world economy: Greenspan

WASHINGTON - A decision to float the yuan could weaken the Chinese banking system and threaten the world economy, the chairman of the US Federal Reserve central bank Alan Greenspan has warned.

Mr Greenspan said in a letter to the US senate that flotation of the yuan, a move wanted by many in the United States, could cause a heavy flow of capital out of China, undermining Chinese banks and destabilising the world economy.

The letter, reported on the Wall Street Journal web site on Tuesday, was published by US senate banking committee chairman Richard Shelby, who had asked Mr Greenspan to expand on his views on the yuan.

Mr Greenspan had warned that up to 50 per cent of Chinese bank loans were non-performing and that this was sustainable only if depositors did not withdraw their funds.

'Many in China fear that removal of capital controls that restrict the ability of domestic investors to invest abroad and to sell or to purchase foreign currency, which is a necessary step to allow a currency to float freely, could cause an outflow of deposits from Chinese banks, destabilising the system.'

Financial instability in a big emergent economy, such as the Chinese economy, 'would present a risk to the global economic outlook', he warned. ...Link