Jakarta: Asian currencies need to strengthen further to deter potentially dangerous hot money inflows and help correct global trade imbalances, the International Monetary Fund said Thursday.
The Fund’s latest economic outlook for the Asia-Pacific region said growth would moderate in 2011 in the region’s advanced economies while remaining “particularly strong” in emerging markets such as China, India and Indonesia.
The region would continue to lead the global recovery but dangers on the horizon included rising consumer prices, asset price bubbles and torrents of short-term foreign capital into share and bond markets.
“Greater exchange rate flexibility offers an important buffer against the risk posed by large capital inflows,” the report said.
China’s allegedly undervalued yuan has been the target of strong complaints from the United States and Europe, who say Beijing is unfairly gaining a trade advantage by cheapening its exports.
Global currency wars and trade imbalances between importing and exporting economies are expected to be high on the agenda at a Group of 20 finance ministers’ and central bankers’ meeting in South Korea this weekend.
A draft communique issued ahead of the meeting promises a more “market-determined exchange-rate system”, reflecting a position long held by the United States and other consumers of Asian exports.
The IMF said the yuan, which has risen more than 2.5 % against the dollar since early September, “remains substantially below the level consistent with medium-term fundamentals”.
Asia-Pacific director Anoop Singh said it was “in Asia’s own interest” to “accelerate the process of rebalancing”.
“An important component of this involves exchange rate appreciation. It is only natural that, as these economies strengthen, so too their currencies would need to be stronger,” he said.
The strength of Asia’s emerging economies has been reflected in the currencies of countries like India, Indonesia, Malaysia and Thailand, which have approached 10-year highs in 2010.
The IMF said exports would slow from the very high rates of 2009 and early 2010, helping to at least narrow some of the international trade gaps that have given rise to protectionism fears.
But it warned: “The relatively limited reduction in projected surpluses over the medium term would contribute to global imbalances remaining elevated.”
The recovery was likely to be sluggish in the biggest markets for Asia’s exports, so countries needed to do more to promote domestic demand by boosting investment in infrastructure and encouraging private sector investment.
Monetary tightening and other measures will help reduce the risk of overheating as foreign capital, seeking better returns than currently available in Europe and the United States, pours into the region, the Fund said.
“Continued capital inflows may also pose risks to financial stability if they are associated with excessively easy domestic financial conditions,” the report said.
On interest rates, strong economic expansion and growing signs of inflation suggested the region had “reached the threshold to normalise policy stances across the region”.
“Many economies have started to take steps in this direction,” it said, two days after Beijing announced its first interest rate rise in three years.
Other countries such as India, Singapore and Thailand have also increased the cost of borrowing recently to curb rising consumer prices.
Chinese consumer prices rose at their fastest pace in nearly two years in September, official data showed Thursday.