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Chance of economic crisis in China low

(Reuters)
Updated: 2006-09-03 10:04

WASHINGTON - Federal Reserve Chairman Ben Bernanke said in a letter obtained on Friday that chances of an economic crisis in China were low, but that the possibility of a "hard landing" for the economy could not be dismissed.

"We believe that the chance of a Chinese economic crisis is very low for the foreseeable future," Bernanke wrote in a August 30 letter to Senate Banking Committee Chairman Richard Shelby.

Chairman of the Federal Reserve Ben Bernanke is seen in Washington, July 20, 2006. Rising incomes should support the U.S. economy even as the housing market slows and consumers lose the boost they were getting from home equity, Bernanke said in a letter released on Wednesday. [Reuters]

"Although the banking sector is burdened with an enormous and probably growing stock of problematic loans, the government possesses sizable resources and is unlikely to allow the banking system to fail," Bernanke told the Alabama Republican. He also said Beijing's large foreign exchange reserves made a currency crisis unlikely.

"However, we do not entirely discount the possibility of a 'hard landing,' in the form of significantly slower growth, as authorities attempt to reduce investment growth from its current rapid pace," he wrote.

The Fed chief said the rapid pace of investment in China was leading to overcapacity in some industries and likely adding to bad loans already on bank books.

"However, there is less evidence of widespread overheating. Inflation is still quite low," he added.

Bernanke said Beijing had indicated it wanted to rein in the pace of investment spending and reduce its reliance on export-led growth.

"They have taken some steps to try to encourage consumption. However, they still have not allowed a substantial appreciation of the renminbi (currency), a step that many analysts argue would be the most effective way to address the imbalances in the economy," he said.

U.S. manufacturers complain an undervalued renminbi, or yuan, gives Chinese producers an unfair advantage in global markets and the Bush administration has pressed China to rely more on market forces to determine the value of the currency.

Bernanke's letter, which came in response to written questions Shelby submitted in conjunction with a July 19 Senate Banking Committee hearing on the U.S. economy, was made available by the senator's office.