Bush urges China to loosen currency system

By Andrea Hopkins and Caren Bohan

WASHINGTON (Reuters) – The Bush administration, facing
rising pressure over the record U.S. trade deficit, on Monday
urged China to further liberalize its currency policy but
predicted the trade imbalance would eventually moderate.

In an annual summary of economic policies and goals, the
White House said it was in China’s best interests to allow its
yuan currency to float more freely.

“Greater exchange-rate flexibility would provide China with
a useful policy tool to help stabilize its business cycle. It
would also help China to reorient its future growth away from
net exports and toward higher domestic demand,” President
George W. Bush’s Council of Economic Advisers wrote in the
Economic Report of the President.

Markets will be watching the report closely this year since
new Federal Reserve Chairman Ben Bernanke helped craft it in
his previous incarnation as White House CEA chairman. He moved
to the Fed on February 1.

Data out last week showed the U.S. trade gap ballooned in
2005 to a record high of $725.8 billion, accelerating calls by
lawmakers for a tougher trade stance toward China.

The White House report linked the surging shortfall in the
current account, the broadest measure of U.S. trade since it
includes investment flows, to structural issues in the world
economy that have fueled a savings glut among Asian countries
like China and Japan.

Bernanke, who served on the Fed board before moving to the
White House in June, has argued a surfeit of savings in Asia
was a big factor in global trade imbalances, a contention that
became a touchstone in the debate over how dangerous such
imbalances may be.

The report also acknowledged that Americans, whose saving
rate has fallen below zero for the first time since the Great
Depression, had to rein in spending while the government must
cut the budget deficit.