'Keeping lid on yuan risks global crisis' Bernanke tells China

Federal Reserve Chairman Ben Bernanke yesterday issued a stern warning to China, saying it and other emerging nations were putting the global economy at risk by keeping their currencies artificially low.

The Fed chief made the remarks during his speech to a conference at the European Central Bank in Frankfurt.

"Currency undervaluation by surplus countries is inhibiting needed international adjustment and creating spillover effects that would not exist if exchange rates better reflected market fundamentals," he said, without mentioning China by name. According to US officials, an undervalued Chinese yuan gives the Asian export giant an unjust advantage.

Because countries are recovering from the severe global recession at different speeds, tensions between nations have risen, making it harder to find global solutions to global problems, Bernanke said.

Emerging countries such as Brazil, China and India are growing at much faster rates than mature economies such as Britain, Japan and the United States. Those emerging economies face the challenge of keeping growth robust, without igniting inflation, Bernanke said.

"Insufficiently supportive policies" in the United States and other advanced economies could "undermine the recovery not only in those economies but for the world as a whole," Bernanke said.

His comments come days after a US congressional report called on Washington to do more to force China to increase the value of its currency. Yesterday, the Chinese Foreign Ministry countered that that constitutes interference in Beijing's internal affairs and accused the US-China Economic and Security Review Commission of having a "Cold War mentality" and of harbouring a grudge against China.

At a summit of world leaders in South Korea last week, Brazil, China, Germany and other countries complained that the Fed's plan would give US exporters a competitive price edge by flooding world markets with dollars. A weaker dollar makes US goods more attractive to foreign buyers.

Other countries, including Indonesia and Thailand, also fear that falling Treasury yields will send money flooding their way in search of higher returns. Such emerging markets could be left vulnerable to a crash if investors later decided to pull out and move their money elsewhere.

Bernanke has sought to defuse criticism of the Fed's $600 billion bond-purchase plan by arguing that it's needed to boost the US economy and reduce unemployment. But he warned that the Fed's programme can't succeed on its own.

"There are limits to what can be achieved by the central bank alone," he said.