China's currency peg to the dollar puts its economy at risk of overheating, Federal Reserve chief Alan Greenspan said on Thursday, while dismissing U.S. manufacturer charges that the tie has cost America jobs.

"A rise in the value of the renminbi would be unlikely to have much, if any, effect on aggregate employment in the United States, but a misaligned Chinese currency, if that is indeed the case, could have adverse effects on the global financial market and, hence, indirectly on U.S. output and jobs," Greenspan told the World Affairs Council of Greater Dallas.

"(Chinese) central bank purchases of dollars, unless offset, threaten an excess of so-called high-powered money expansion and consequent overheating of the Chinese economy," he said, echoing an argument he has made in the past.

China buys dollar-denominated assets to keep the value of the renminbi, or the yuan, pegged at 8.28 to the dollar.

Greenspan noted China had taken some steps to offset its dollar purchases and rein in money supply growth, which could fuel inflation and lead to a need to put a sharp brake on the economy. But he said a rapid monetary expansion was nonetheless underway.

"Should this pattern continue, the central bank will be confronted with the choice of an overheated economy, with its potential recessionary consequences, or a curtailing of dollar asset purchases," Greenspan added. "The latter presumably would allow the renminbi to appreciate against the dollar."

The dollar slipped modestly on foreign exchange markets shortly after Greenspan's comments.

Employment in U.S. factories has fallen 2.8 million over the past 40 months, fueling cries for protection that have caught the ears of politicians. Much of the focus has been on China.

U.S. manufacturers have complained vociferously that Chinese producers have benefited unfairly from the currency peg. The Bush administration has been pushing China to move toward a more flexible system of foreign exchange.

However, Greenspan argued any decrease in Chinese imports into the United States from a stronger yuan would likely be offset by a pick-up in imports from other low-wage countries.

He said while Chinese exports to the United States had risen, that gain had come at the expense of other East Asian exporters. The U.S. trade gap with China hit a record US$103 billion in 2002 and is expected to top US$120 billion this year.

Arguing against what he termed the "so-called conventional wisdom," Greenspan said the loss of U.S. jobs was not due to low-priced competition from abroad but to weak exports, a drop in business investment and increases in business efficiency.

Greenspan, as he did in a speech last month, offered a staunch defense of free trade, saying a rise in trade protectionism in the United States carried more costs than benefits.

"Were we to yield to such selective nostalgia and shut out a large part, or all, of imports of manufactured goods and produce them ourselves, our overall standards of living would fall," Greenspan warned. "The consequences of moving in that direction in today's far more globalized financial world could be unexpectedly destabilizing," he added.

The Fed chief conceded that low-wage U.S. workers were "being priced out of the global labor market," but said history counseled that any jobs lost would be replaced.

"We can ... be confident that new jobs will displace old ones as they always have," he said.

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