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Central banks warn of China economy risk

(AP)
Updated: 2007-06-06 09:13

CAPE TOWN, South Africa - Central bank chiefs from the U.S., Europe and Japan warned Tuesday of the risks of the Chinese economy overheating, potentially adding to inflationary pressures in other countries.

U.S. Federal Reserve Chairman Ben Bernanke and European Central Bank President Jean-Claude Trichet also urged Beijing to let its currency rise in value, saying it would benefit both China and the global economy.

"A quick pace toward greater flexibility would be in China's interest and create more flexibility for monetary policy to address the potential overheating of their economy," Bernanke said in a satellite linkup with a banking conference in Cape Town.

"We could all be better off, China on the one hand and the global economy on the other hand," echoed Trichet.

Critics argue that China is keeping its currency artificially low, contributing to its massive trade surplus with other countries and undermining competitors' prices.

Both Bernanke and Trichet conceded that the cheapness of Chinese products flooding world markets had helped reduce global inflation, although said this was balanced by China's huge appetite for fuel and raw materials -- which has contributed to higher oil prices.

Overall, China's impact on global inflation was "modest," Bernanke said.

China is one of the world's fastest-growing economies, and its expansion has had a ripple effect on prosperity in other countries and offset more modest growth rates in North America, Europe and Japan.

Trichet said the current boom was "absolutely exceptional in the global economy," but warned that this could not last indefinitely.

"Complacency would be the worst possible advice for all of us," he said.

Japan, where growth is a sluggish 2 percent, is keeping a watchful eye on the new Asian giant.

"We need to be mindful of the risk of overheating and we can't rule out some risk of inflation in the Chinese economy," said Toshihiko Fukui, governor of Japan's central bank.

China is witnessing a stock market boom, with millions of first-time investors jumping into the market, tapping savings and retirement accounts and mortgaging homes to buy stocks. Authorities are worried that the new money is fueling a bubble in prices.

Chinese stocks rebounded Tuesday in volatile trading after their sharpest one-day drop in three months a day earlier as strong buying by institutions offset selling by retail investors. The benchmark Shanghai Composite Index fell 8.3 percent on Monday -- the benchmark's sharpest decline since an 8.8 percent drop Feb. 27 triggered a global market sell-off.



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