Greenspan: Beijing Dollar-Buying May Overheat Chinese Economy

By Agence France-Presse U.S. Federal Reserve Chairman Alan Greenspan warned March 2 that Beijing's massive buying of dollars threatened to overheat the Chinese economy. China had accumulated $420 billion in foreign-exchange reserves by November of last year as it snapped up U.S. government bonds to keep the yuan-dollar rate steady, Greenspan told the Economic Club of New York. "Chinese central bank purchases of dollars, unless offset, threaten an excess of so-called high-powered money expansion and a consequent overheating of the Chinese economy," he said. Beijing had mopped up some of the excess liquidity created by its purchases by cutting loans to commercial banks, selling bonds and requiring banks to keep higher reserves. But a broad measure of Chinese money supply -- M2 -- had grown 20% in 2003 and a little less so far this year. "Should this pattern continue, the central bank will be confronted with the choice of curtailing its purchases of dollar assets or facing an overheated economy with the associated economic instabilities," Greenspan warned. "Lesser dollar purchases presumably would allow the renminbi [yuan], at least temporarily, to appreciate against the dollar." Copyright Agence France-Presse, 2004