MercoPress. South Atlantic News Agency

Greenspan warns about Chinese financial fragility

The Chinese financial system is currently weak and the abrupt disengagement of the flotation system pegged to the US dollar could worsen the situation warned US Federal Reserve Chairman Alan Greenspan in a letter to the Banking Affairs Committee of the US Senate.

The Bush administration has been pressing the Beijing government to end the link of the yuan with the US dollar and allow the Chinese currency to float freely in an open market.

But Mr. Greenspan warned the US Senate that the free flotation of the yuan entails a serious risk for the weak Chinese banking system, and 50% of all loans could be in risk in that scenario.

"Many believe that removing capital movement controls which restrict local investors to operate overseas and sell and buy foreign currencies, (which is a necessary step for the free flotation of the yuan) could inevitably lead to a run on Chinese bank deposits, destabilizing the whole system". "The financial instability in one of the major emerging markets economies such as China, could entail risks for the global economy", wrote Mr. Greenspan.

Reforms in the banking system are needed previously and the Chinese government is addressing the issue added the Fed Chairman.

US manufacturers and exporters have accused China of deliberately having an undervalued currency (up to 40%) which gives Chinese companies a great edge over their competitors plus causing the loss of many industrial jobs in the US.

The US trade deficit with China reached 124 billion US dollars in 2003, the largest ever, becoming a most sensitive political issue in the current electoral year.