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Greenspan Urges Caution Before China Lets Currency Float - 2004-03-02

The top U.S. central banker is warning Congress that the global economy could suffer if China moves too quickly to let its yuan currency trade freely on international markets.

In a letter to a key Senator, Federal Reserve Chairman Alan Greenspan said China needs to shore up its "quite weak" banking system before it stops pegging its currency to the dollar.

The Bush Administration has been trying to persuade Beijing to end a policy of restricting its currency's exchange rate to just over eight to the dollar.

Some U.S. businesses say this and other restrictions keep Beijing's currency artificially weak, and gives Chinese-made goods an unfair advantage on world markets.

China would have to make major policy changes to let market forces set the currency's value. Mr. Greenspan says loosening these restrictions could hurt the country's fragile banking system.

Those institutions are burdened by a huge number of bad loans and other problems. He says they would have serious problems if depositors could freely exchange their money for foreign currencies and move their money out of the fragile system.

Mr. Greenspan says the resulting damage to China's economy might also hurt huge nation's many trading partners.