Bank of Canada Governor Mark Carney said Wednesday China is "running great risks" with its policy of buying U.S. dollars to control the value of its own currency, the yuan.
Never shy in voicing his dislike of China's efforts to control its exchange rate, Mr. Carney was especially critical in testimony at the Senate Banking Committee, saying the Chinese government's policy contributed to the instability that set the stage for the financial crisis.
"China engages in persistent, actual intervention," Mr. Carney said, noting the country's foreign-exchange reserves have grown in excess of $2-trillion (U.S.). "They are running great risks with this policy. It is a cause of some of the imbalances in the global economy. It is a contributing factor to some of the vulnerabilities that have existed and were realized."
China controls the value of its currency to give its exporters a price advantage on international markets, arguing it needs to prop up its industrial base to create jobs at a fast enough rate to maintain relative peace in its vast and diverse population.
That approach created an "imbalance" in the world economy by lowering the cost of borrowing in the United States, sparking the debt-fuelled spending binge that led to the collapse of the country's housing market. The Bank of Canada and others warned of the dangers of these imbalances for years to little effect.
The leaders of the Group of 20 economic powers, which includes the U.S. and China, pledged in Pittsburgh last month to adopt policies in the future that avoid putting at risk their neighbours and trading partners. Among the policy changes needed are initiatives that increase savings in the U.S. and the loosening of China's rigid controls, such as its currency policy, that favor exports over growth of domestic demand.
"It is a top priority for all policy makers to work with the Chinese and develop a suite of policies across all major economies, including China, that are consistent with moving off this policy" of controlling the yuan, Mr. Carney said.
Canada's central bank chief made the remarks on China in response to a question about why the Bank of Canada doesn't similarly seek to control the value of the Canadian dollar through direct intervention in foreign exchange markets.
Mr. Carney reiterated that any decision about intervention would be based on achieving the central bank's target to keep inflation advancing at an annual rate of about 2 per cent a year.
"We will use options as needed and we will achieve our mandate," Mr. Carney said.