America's war of words with China hots up

There was no sign of peace breaking out in the world's "currency wars" yesterday when the chairman of the US Federal Reserve, Ben Bernanke, made a barely disguised attack on China.

Intensifying long-standing American complaints about the Chinese policy of keeping her currency low to encourage exports and produce a healthy trade surplus, Mr Bernanke said that "large, systemically important countries with persistent current-account surpluses" had "inhibited macroeconomic adjustments". This, said Mr Bernanke, was leading to a "two-speed" world recovery, which in turn would be "resolved in favour of slow growth for everyone if the recovery in the advanced economies falls short".

Mr Bernanke, speaking at a conference of European central bankers in Frankfurt, said that currency undervaluation by some countries imposed a heavier burden on countries, such as the US, that permitted "substantial flexibility in their exchange rates".

In the charts accompanying Mr Bernanke's talk the nations identified as surplus countries were China, India, Brazil and Indonesia.

The Fed's decision to pump an extra $600bn (£380bn) into the US economy to boost demand and, incidentally help push the dollar down and the Chinese currency up, was also stoutly defended. Mr Bernanke declared the best way to support world recovery was "through policies that lead to a resumption of robust growth in a context of price stability in the United States".

"Insufficiently supportive policies in the advanced economies could undermine the recovery not only in those economies, but for the world as a whole."

Going further than diplomacy usually allows, Mr Bernanke even told the Chinese why their currency policy was unwise for themselves. Currency undervaluation, he added, leads to "excessive or volatile capital inflows".

Mr Bernanke also stressed the way that all the balance of adjustment – from peripheral eurozone nations to the US itself – required deflation and hardship in deficit nations: "The international monetary system has a structural flaw; it lacks a mechanism, market-based or otherwise, to induce needed adjustments by surplus countries.

"It would be desirable for the global community, over time, to devise an international monetary system that more consistently aligns the interests of individual countries with the interests of the global economy as a whole."

At the recent G20 summit in Seoul, the US Treasury Secretary, Timothy Geithner, proposed a cap of 4 per cent of GDP on surpluses, an idea met with derision by the surplus nations.

Admitting the failure of the G20 to come to a concrete agreement on the "global imbalances", Mr Bernanke commented that the "sense of common purpose has waned. Tensions among nations over economic policies have emerged and intensified, potentially threatening our ability to find global solutions to global problems".

Unspoken by Mr Bernanke, though, was the possibility that the new Congress might opt for protectionism, turning the currency wars into a trade war.