G20 Finance Meeting ~ October 22-23-2010 in Gyeongju, Republic of Korea ...
October 19, 2010World Bank Optimistic on East Asia, Sees Capital Flow Risks
Asian currencies are appreciating as low yields in developed countries drive capital flows to the region, the development lender said on Tuesday. This is a risk because it could fan inflation, lead to asset bubbles and harm the banking sector.
Intervention to slow currency gains has had limited success and uncoordinated intervention is only adding to global liquidity, the World Bank said.
Capital controls are not very effective in controlling long-term investment flows, the bank added.
"We are seeing an effort by developing East Asia to deal with the large amounts of liquidity driven in very large part by the monetary policy easing in the United States," Vikram Nehru, the World Bank's chief economist for Asia-Pacific, told reporters on Tuesday.
"If this liquidity abundance is sustained and increases, I think they are going have to take further action."
Group of 20 finance ministers, meeting in South Korea on Friday,will grapple with the global currency system as developed and emerging countries trade barbs over competitive devaluation.
Asian countries have a mix of instruments available to deal with rising inflows, such as adjusting monetary policy, withdrawing stimulus and regulating the banking sector to prevent careless borrowing and lending, Nehru said.
Mix of Instruments
Policymakers need to be careful that currency intervention does not lead to inflation, Nehru said, as it would increase the money supply.
The developing economies of East Asia will grow 8.9 percent in 2010, the World Bank said in its semi-annual East Asia and Pacific Economic Update report. In April, it had projected 8.7 percent growth.
Excluding China, developing East Asia will expand 6.7 percent this year, up from its previous forecast of 5.5 percent.
"Encouragingly, the private sector is once again becoming the engine of growth, confidence is returning, and trade flows have returned to levels," the report said.
"The return of large capital inflows to the region, combined with rising inflationary pressures and climbing asset prices, presents an emerging policy challenge and a growing risk to macroeconomic stability."
For 2011, East Asian growth will slow to 7.8 percent, less than an earlier forecast of 8.0 percent growth, the Washington-based lender said
Strong expansion in private consumption and a recovery in external demand are supporting East Asian growth, the World Bank said in the report. But lackluster growth in the developed world and tightening measures to slow inflation mean the pace of Asian growth will moderate, the report said.
For China, inflation is likely to rise in the short term, but wage growth is near historical averages and is unlikely to cause an inflationary spiral, the report said.
Since its economy is operating near full capacity and there are concerns about nonperforming loans in the banking sector, China needs to withdraw expansionary monetary policy, the report said.
China should also rebalance its growth from industry and investment by placing more emphasis on services and consumption, the World Bank said.
Middle-income countries, such as Indonesia and Thailand, should encourage innovation and invest in human capital to move to high-income status, the bank said.
http://www.cnbc.com/id/39732943
