Asia’s economies including China should allow stronger and more flexible currencies to boost domestic demand and deter speculative capital inflows, the International Monetary Fund said.
“Looking beyond the crisis, Asia’s medium-term prospects depend on how successfully it is able to rebalance the drivers of growth, with greater reliance on domestic sources compared with external demand,” the Washington-based fund said in its semiannual World Economic Outlook report yesterday.
China and its neighbors in the region will need to adopt “appropriate appreciation” of their currencies to bolster incomes and purchasing power, the IMF said. Asia also needs to remove impediments to local investment and boost productivity in the services industry, it said.
Policy makers from Brazil to South Korea have taken steps to cool gains in their currencies as investors pour money into emerging and Asian economies, which are outperforming developed nations like the U.S., Japan and those in Europe. While China loosened a two-year peg of 6.83 per dollar in June, it has capped the yuan’s gains at about 2 percent since then.
China’s moves to boost the yuan have been “not exactly what we would have hoped ourselves,” European Central Bank President Jean-Claude Trichet said this week. The U.S. House of Representatives passed a measure on Sept. 29 that would let American companies seek compensation for imports from countries with misaligned exchange rates.
A stronger Chinese currency could prompt others in Asia to follow, facilitating “the needed shift toward domestic sources of growth,” the IMF said.
Asia faces policy challenges as capital flows to the region increase, raising the risk of inflation, asset price bubbles and financial sector instability, the fund said. It estimates that capital inflows to emerging Asia in the past 12 months more than quadrupled from 2008 levels.
A more flexible currency, especially in countries with excessive external surpluses, could increase the “perception of exchange-rate risk and discourage speculative capital inflows,” the IMF said. “Where large current-account imbalances may reflect an undervalued exchange rate, currency appreciation is the best response to capital inflows.”
The region should coordinate its response to capital inflows, the IMF said.
In China, the real-estate market may experience “overheating,” the IMF said. Home prices in China rose 9.3 percent in August from a year earlier, even after Premier Wen Jiabao’s government implemented measures to cool the property market since April.
The world’s fastest-growing major economy may expand 10.5 percent this year and 9.6 percent in 2011, the IMF forecasts. A “greater-than-anticipated slowdown” in the nation could hurt the global recovery, the IMF said. Growth was 10.3 percent in the second quarter, easing from an 11.9 percent pace in the three months through March.
China’s expansion has served as a “linchpin” for global trade, benefiting commodity exporters including Australia and Indonesia, and economies that sell capital goods, like Germany and Japan, the IMF said. Still, “China will provide only a partial offset to the weaker demand from advanced economies,” as its domestic consumption isn’t big enough, the lender said.
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