Washington, DC, February 17, 2006—Fed Chairman Ben Bernanke, barraged with lawmakers' questions on Thursday over rising foreign ownership of U.S. assets, played down fears that China held enough dollars to endanger the U.S. economy.
In a second day of Capitol Hill testimony, the new central bank chief was pressed hard by Senate Banking Committee members about whether soaring U.S. trade deficits, financed by foreign borrowing, made the economy and the dollar vulnerable.
"I don't think that the Chinese ownership of U.S. assets is so large as to put our country at risk economically," Bernanke said, minimizing the possibility that China might suddenly dump some of its U.S. debt.
"It would be very much against their own interest to do so," he said, ducking a question whether these holdings gave Beijing a potential political lever over the United States.
Congressional anger toward China has grown along with soaring U.S. trade deficits that hit a record $725.8 billion in 2005--about 28 percent of that with China alone.
At the end of 2005, China held some $819 billion worth of U.S. assets, mostly in Treasury debt. Its U.S. holdings were surpassed only by Japan, which held $829 billion worth.
Beijing and Tokyo acquired most of their U.S. securities with money they earned from selling cars, computers and other consumer goods into U.S. markets--goods U.S. competitors and some lawmakers argue are kept unfairly cheap because of currency actions by the Asian nations.
Bernanke said if foreign governments announced they were going to buy less U.S. debt or even sold some, this would not be destabilizing for the United States.
"I am not aware of any significant changes in plans to hold U.S. dollar assets by foreign central banks," he said. "My belief is moderate changes in the holding of dollar assets would not have significant impact on U.S. asset values."
Not only lawmakers but the Bush administration has grown increasingly frustrated with China, particularly over its reluctance to let its yuan currency rise in value to reflect its growing market power.
U.S. Treasury Secretary John Snow strongly hinted on Thursday that Treasury was considering naming China a currency manipulator in a report scheduled for release in April--a step that could open China to U.S. trade retaliation.
"You always want to take market reaction into account when government makes a determination," Snow told reporters in Chicago when asked whether top officials were discussing the possibility privately with investors.
"Prudent governments will always try and assess markets and try and prepare markets so markets aren't disrupted," he said.
Earlier this week, U.S. Trade Representative Rob Portman issued a report vowing to take tougher steps to make China play fair on trade.
Bernanke, under persistent questioning, said he thought China should adopt a more flexible currency because it was in its own best interest to do so. China now needs to keep recirculating its huge income from selling abroad for fear it could spark inflation in its domestic economy.
As he told a House of Representatives panel a day earlier, Bernanke said the U.S. expansion remained "on track" and again implied he felt more interest-rate rises were needed to keep inflation at bay.
"The economy now appears to be operating at a relatively high level of resource utilization," he said in remarks that matched Wednesday's statement.
"The risk exists that, with aggregate demand exhibiting considerable momentum, output could overshoot its sustainable path, leading ultimately--in the absence of countervailing monetary policy action--to further upward pressure on inflation," he added
