WASHINGTON - Federal Reserve chairman Ben Bernanke said Wednesday that China would help its own economy as well as global trade imbalances by allowing the yuan to float freely.
"I do think that it is in China's interest to allow their currency to float, to appreciate," Bernanke said in response to a question at a House Financial Services Committee hearing as he delivered the central bank's semianual economic report.
The tight trading band for the yuan "distorts the economy and puts more resources into the export sector," Bernanke said.
He noted that less than 40 percent of China's economic output goes to domestic household consumption.
"They need to reorient their economy to produce more for the domestic market and be less oriented to the external market and changing the value of the currency is one step to doing that," he said.
Additionally, the US central bank chief said that "without a flexible exchange rate (Chinese authorities are) unable to run independent monetary policy" making it more difficult to deal with inflation, for example.
Some lawmakers in Washington accuse Beijing of keeping its currency purposefully low to give its exporters an unfair advantage.
China revalued the currency by 2.1 percent from 8.28 yuan in July 2005 and has since then allowed the unit to rise about six percent.
In May, the daily trading band against the dollar was widened to 0.5 percent from 0.3 percent on either side of a central parity rate, in theory making it possible that the currency could appreciate more quickly.
However, the reality is that the central bank almost never allows the currency to fluctuate sharply, a reflection of China's stated policy of only allowing a stable and steady rise of the yuan.
The yuan has traded as high as 7.5628 to the dollar.
07/18/2007 15:57 GMT