Bernanke Takes Aim at China - WSJ.

com#printMode

Dow Jones Reprints: This copy is for your personal, non -commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or
customers, use the Order Reprints tool at the bottom of any article or visit www.djreprints.com
See a sample reprint in PDF format. Order a reprint of this article now

ECONOMY NOVEMBER 19, 2010

Bernanke Takes Aim at China

By JON HILSENRATH

(Please see
Corrections &
Amplifications item
below.)

Federal Reserve
Chairman Ben
Bernanke fired back
amid criticism at
home and abroad of
the Fed's easy-
money policies,
arguing that China
and others are
causing global
problems by
preventing their
currencies from
strengthening as
their economies
Reuters
boom.
Fed Chairman Ben Bernanke delivers his keynote speech in Frankfurt.

By keeping their
currencies artificially weak, Mr. Bernanke argued in Frankfurt
Friday, China and other emerging markets are allowing their
economies to overheat, preventing trade imbalances from
adjusting and worsening what he called a "two-speed" global
recovery.

Their "strategy of currency undervaluation" is preventing more

"balanced and sustainable" global growth, he warns, echoing a
view expressed by Obama Administration officials.

Bernanke fired back at critics upset with the Fed's new Mr. Bernanke has come under attack for the Fed's decision to
stimulus plan, arguing that China and other nations are

http://online.wsj.com/...B10001424052748703374304575623144102357582.html?mod=WSJ_hp_mostpop_read#printMode[11/20/2010 10:56:24 PM]

Bernanke Takes Aim at China - WSJ.com#printMode

purchase $600 billion in U.S. Treasury bonds in an effort to drive

causing problems by preventing their currencies from
strengthening. Jon Hilsenrath, Evan Newmark and
Dennis Berman discuss. And Brett Arends discusses
the oddly behaving market for muni bonds, whose
yields rose above not only Treasurys but also above
some corporate bonds.
down long-term interest rates. Critics in the U.S say it could cause
inflation. Critics abroad say the flood of dollars that the Fed is
effectively printing to finance its bond purchases is pouring into
overseas markets and could cause asset bubbles.

Some also have accused the Fed of trying to weaken the dollar to spur U.S. exports.

Fed officials have denied that is their goal, though Mr. Bernanke
More
effectively acknowledged the U.S. currency should weaken against
Charts From Bernanke's currencies in emerging markets, because their economies are
Presentation: Data on Emerging-Market
Economies growing so much faster than economies in the developed world.
Bernanke: Forex Not Only Way to
Rebalance The Fed chairman's message, though scholarly in tone, was
Real Time Economics: Bernanke unusually blunt in laying blame for inflationary pressures in
Translated emerging markets and for tensions over currencies on countries
Inside the Fed's Balance Sheet like China. A chart accompanying his comments also pinpoints
MarketBeat: Fed vs. China: It's the Food, Taiwan, Singapore and Thailand as aggressively trying to hold
Stupid their currencies down, while India, Chile and Turkey aren't.

"Why have officials in many emerging markets leaned against appreciation of their currencies toward levels more
consistent with market fundamentals?" Mr. Bernanke asks. Mainly, he says, because they are sticking to a long-
term strategy of pushing for export-led growth with cheap exchange rates.

EXPERIENCE WSJ PROFESSIONAL

Editors' Deep Dive: Price Controls
Cloud Investment Outlook
ECONOMIST INTELLIGENCE UNIT - VIEWSWIRE
Vietnam Economy: Reform Roll-Back?
DOW JONES BUSINESS NEWS
Venezuela Inflation Slows but Risks Remain
THE ECONOMIST
Argentina Booms Again, for Now
Access thousands of business sources not
available on the free web. Learn More
Central banks manage exchange rates by intervening in currency
markets. As dollars flood into their economies from exports, the
central banks use the dollars to purchase assets like U.S. Treasury
bonds rather than allowing those dollars to be exchanged freely for
domestic currencies. That keeps the domestic currencies from
rising in value.
Mr. Bernanke noted that in preventing the yuan from appreciating,
China has accumulated a massive $2.6 trillion stock of foreign-
currency reserves. Most of that is in U.S.-dollar assets. An
alternate risk for the U.S.: If China sells its U.S. bonds, it could
push down their value and push up U.S. interest rates.

Mr. Bernanke also made his case against domestic critics, arguing
that U.S. unemployment could keep rising without action by the Fed and that inflation is too low and could fall
further.

Though critics say inflation could soar because of the Fed's actions, Mr. Bernanke said it is around 1%, is likely to
be "quite subdued" for a long time and that he is committed to allowing it to go no higher than 2%.

"On its current economic trajectory the United States runs the risk of seeing millions of workers unemployed or
underemployed for years," Mr. Bernanke warned. "As a society, we should find that outcome unacceptable."

Mr. Bernanke got a voice of support Thursday from Narayana Kocherlakota, president of the Federal Reserve Bank
of Minneapolis. In comments in Chicago he supported the Fed's easing program, describing it as "a move in the
right direction," though he had expressed some skepticism about the program in the past. He and Mr. Bernanke
said the program wasn't a cure-all.

Write to Jon Hilsenrath at jon.hilsenrath@wsj.com

http://online.wsj.com/...B10001424052748703374304575623144102357582.html?mod=WSJ_hp_mostpop_read#printMode[11/20/2010 10:56:24 PM]

Bernanke Takes Aim at China - WSJ.com#printMode

Corrections & Amplifications

China has $2.6 trillion in foreign-currency reserves, mostly in U.S.-dollar assets. An earlier version of this article
incorrectly said China has $2.6 trillion in U.S.-dollar assets.

Copyright 2010 Dow Jones & Company, Inc. All Rights Reserved
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by
copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit
www.djreprints.com

http://online.wsj.com/...B10001424052748703374304575623144102357582.html?mod=WSJ_hp_mostpop_read#printMode[11/20/2010 10:56:24 PM]