The US trade deficit with the rest of the world won't fall if China revalues its yuan currency as the Bush administration wants, Federal Reserve Chairman Alan Greenspan said today.
Answering questions after addressing the Economic Club of New York, Mr Greenspan said there was little doubt China will let its yuan currency appreciate against the dollar since it is also under internal pressure to do so.
But he poured cold water on the idea that a revaluation will shrink a record bilateral deficit with China that hit $162 billion last year. It will mean that suppliers will turn to other countries like Malaysia or Thailand for cheap textiles and other goods that China now supplies.
"So essentially what we will find is we are importing from a different area but we'll be importing the same goods," Mr Greenspan said.
"The effect will be a rise in domestic prices in the United States and as a consequence of that, we will have other impacts which I could trace through but I've fortunately run out of time in this question."
Mr Greenspan acknowledged that China needs to amend its exchange-rate policies for its own good. In order to maintain the peg without sparking inflation, China must "sterilise" the large amount of reserves it amasses in the process of buying US dollars and issuing yuan-denominated debt.
"The trouble with the sterilisation issue is that they're only able to sterilise about half of what they are accumulating," Mr Greenspan said, which has the effect of leaving its financial system awash in cash that can fuel inflation.
Mr Greenspan also acknowledged that he saw a lot of "froth" in housing markets but held to his view that there was no general economic threat from a potential collapse in housing prices.
"We don't perceive that there is a national bubble but it's hard not to see ... that there are a lot of local bubbles," he said.