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Bernanke Backs Off Calling Weak Yuan a 'Subsidy'

U.S. Federal Reserve Chairman Ben Bernanke recommended Friday that China allow a more flexible currency, saying a stronger yuan would improve the lives of ordinary Chinese and help to ease global trade imbalances.

Bernanke was in Beijing with a delegation led by U.S. Treasury Secretary Henry Paulson, who said Chinese officials pledged to allow more currency flexibility -- a move long sought by Washington -- though he gave no timetable.

A stronger yuan would raise living standards and make China's economy more stable, boosting domestic consumption to balance booming exports, Bernanke said in a speech at a government think tank.

He said a more flexible exchange rate also would give Beijing more effective more control over inflation.

"More flexibility in the RMB would have important advantages for China," the Fed chairman said, referring to the Chinese currency by one of its names, the renminbi, or people's money.

Washington has been pressing Beijing to raise the value of the yuan, arguing that it is undervalued and gives Chinese exporters an unfair price advantage, hurting U.S. companies. Some American lawmakers have threatened to impose tariffs on Chinese goods to compel Beijing to move faster in easing currency controls.

Bernanke noted those criticisms in passing, but avoided joining the debate. While a written text of his remarks called a weak yuan as an "effective subsidy" to exporters -- potential ammunition for Beijing's critics in Washington -- when he delivered them, Bernanke said only that a stronger yuan would reduce "the incentive for Chinese firms to focus on exporting."

"It's better to have a better balance between domestic and foreign demand," he said in the comments at the Chinese Academy of Social Sciences.

The change might have reflected Bernanke's decision to temper his remarks following Paulson's announcement.

Chinese leaders say they want to encourage domestic consumption in order to reduce the country's dependence on export-driven manufacturing industries and investment.

But retail sales and other measures of consumer spending are growing much more slowly than exports.

China says its global trade surplus this year should be at least $168 billion, while the U.S. trade deficit with China is expected to top last year's record of $202 billion. Beijing's overall surplus is smaller than its gap with the United States because China runs deficits with other countries.

Economists say such imbalances cannot continue and that they threaten the stability of the world economy.

Bernanke said more balanced Chinese growth would help to contribute to global stability, though he acknowledged that the United States also had a role to play.

"In order to get more balance in the world economy, the United States and other deficit countries need to save more and China and other surplus countries need to save less," he said.

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