Mr. Greenspan said a revaluation of the Chinese currency would not have the positive effects in the United States that some lawmakers believe it would.
"Some observers mistakenly believe that a marked increase in the exchange value of the Chinese Renminbi [yuan], the so-called RMB, relative to the U.S. dollar, would significantly increase manufacturing activity and jobs in the United States. I'm aware of no credible evidence that supports such a conclusion," he said.
The U.S. central bank chairman also warned against legislation that would impose more than 27 percent tariffs on Chinese goods flowing into the United States, if Beijing doesn't move to a more flexible currency system. He said the tariffs would not help the United States lower its overall trade deficit.
"The broad tariff on Chinese goods that has recently been proposed, should it be implemented, would significantly lower U.S. imports from China, but would comparably raise U.S. imports from other low-cost sources of supply," he said. "At only slightly higher prices than prevail at present, U.S. imports of textiles, light manufactures, assembled computers, toys, and similar products, would in part shift from China, as the final assembler, to other emerging market economies in Asia, and perhaps in Latin America as well."
And, while he urged caution on the U.S. side regarding pressure on China to revalue its currency, Mr. Greenspan added that he thinks it is in China's own interest to loosen its currency exchange regime.
"It is nonetheless the case that a more flexible RMB would be helpful to China's economic stability, and hence, to world and U.S. economic growth," he said. "Rapid accumulation of foreign, largely dollar-reserve holdings by the People's Bank of China, China's central bank, as a consequence of support for the RMB, would boost the growth of the money stock with the accompanying risk of putting upward pressure on inflation and a general overheating of the Chinese economy."
China has been keeping its currency pegged at 8.28 to the dollar for the past decade. Critics say the RMB has become undervalued, which gives Chinese exports an unfair price advantage. They are calling on Beijing to loosen the RMB and let its value rise. Meanwhile, the U.S. Congress is considering proposals to impose punitive tariffs on Chinese imports.
This issue has taken on greater urgency following statistics showing that the U.S. trade deficit hit a record $618 billion last year. The trade deficit with China was nearly $162 billion, the highest ever with a single country.