China dismisses Greenspan warning

China Wednesday dismissed warnings by US Federal Reserve chairman Alan Greenspan that it faces grave economic consequences if it continues to pile up massive US dollar holdings as it defends the pegged yuan system.
"We've seen the report," said an official at the People's Bank of China's press office, refusing to specifically address Greenspan's comments.
"We will maintain our consistent monetary policy, which is a unified, managed floating exchange rate regime (based on supply and demand of foreign exchange in the market)," he said.
Yi Gang, director of the monetary policy department of China's central bank, added: "The basic point of our monetary policy is to maintain the stability of the RMB (renminbi) and to promote the growth of the Chinese economy.
"Both the starting point and standpoint of our monetary policy is the Chinese economy and in addition we also consider the international balance between income and expenditure.
"I think the Chinese macro-economy is stable currently and that will be maintained." The comments, however, appeared out of keeping with those made only last week by China's foreign exchange chief Guo Shuqing, who made similar points to those of Greenspan.
Guo said the financial authorities risked losing control of the economy as speculative money flooded the banking system amid growing speculation the yuan would be re-valued.
"The growing surplus in the balance of payments is putting increasing pressure on the independence of monetary policy," Guo said.
In turn this was creating inflationary pressure as easy credit continued to stoke investment, especially in sectors such as steel, cars and real estate, which the authorities are increasingly concerned about.
In recent months Beijing has been forced to increase mopping up operations in the money market in efforts to absorb the excess liquidity but the broad measure of Chinese money supply - M2 - still grew 20 percent in 2003 and only a little less so far this year.
China's foreign reserves soared by a record 40.7 percent last year to 403 billion dollars and jumped another 13 billion to 416 billion dollars in January.
Under the current dollar-yuan peg, the central bank is forced to issue 8.28 yuan for each dollar it buys as it fights to prevent the yuan from appreciating.
Greenspan said Beijing's massive buying of dollars was threatening to create a glut in the monetary base and a consequent overheating of the Chinese economy.