ADB: China should tighten policy to avoid bubble

ADB: China should tighten policy to avoid bubble

Singapore: China should tighten its fiscal, monetary and foreign exchange policies or risk a housing price bubble and a jump in the inflation rate, a top Asian Development Bank official said on 19 April.

Rajat Nag, the ADB’s managing director general, said China should coordinate with other Asian nations to reduce spending, raise interest rates and revalue currencies in the face of stronger economic growth this year.

“We think the governments in Asia really need to look at withdrawing the stimulus," Nag said in an interview. “It’s going to happen sooner rather than later."

“If we do that, inflation should have a moderate increase, not a serious one."

China has rebounded quickly from last year’s global recession, boosted by a 4 trillion yuan ($586 billion) stimulus spending program and record bank lending to finance construction and other projects.

The ADB last week raised its 2010 economic growth forecast for developing Asian countries to 7.5% from a previous estimate of 6.8% as the region leads the world economic recovery. The bank expects 4% inflation this year in developing Asia, which includes 44 countries and territories from the Pacific to Central Asia, excluding Japan and 3.9% next year.

Nag said China should follow through with measures announced over the weekend to ease property market speculation, including restrictions on lending to buyers who already have two or more homes.

“We’re pleased to see authorities in China starting to take some fairly major steps to cool it (the property market)," Nag said. “We don’t think it’s a full-blown housing price bubble yet. It’s been limited to the coastal areas."

Prices of luxury residential housing in Shanghai and Beijing soared about 50 % last year.

Nag said a revaluation of the yuan would help reduce trade imbalances and develop China’s domestic market.

“The huge stimulus that China provided benefited Asia and the rest of the world," Nag said. “The key now is for China and other countries to temper that."

“Exchange rate flexibility is a key part of that, and we certainly have been urging that."