forex rate

World Bank urges China adopt flexible forex rate to prevent crisis

WASHINGTON, April 27 Kyodo

The World Bank urged China and other East Asian nations Wednesday to adopt flexible currency rates to stem large trade surpluses and capital inflows and prevent trade friction, calling the ongoing situation ''unusual'' and comparing it with the Asian financial crisis in the late 1990s.

''Learning from the lessons of the 1990s, then, greater exchange rate flexibility will likely be a useful policy instrument for many East Asian economies in dealing with the present wave of balance of payments surpluses,'' the World Bank said in its semiannual ''East Asia Update'' report on emerging East Asian economies.

In retrospect, the report said, most analysts believe that it was a major policy mistake for East Asian countries not to have permitted more currency appreciation in the mid-1990s, to slow down capital inflows by making domestic financial assets more expensive for foreigners, discouraging further speculative capital inflows that could not be productively absorbed.

Emerging East Asian economies received net capital inflows estimated at over $100 billion in 2004, with inflows to developing nations reaching $114 billion, mostly to China, the bank said.

Against this backdrop, foreign exchange reserves in emerging East Asian economies increased by over $300 billion in 2004, the equivalent of over 9 percent of their gross domestic products, it said, calling this ''an unprecedented number.''

''What we are seeing is an unusual situation where East Asian economies have large current account surpluses and large inflows of capital at the same time, so dollars are being accumulated even faster than during the mid-1990s,'' said Homi Kharas, the bank's chief economist for East Asia and Pacific.

The bank said emerging East Asia economies, which exclude Japan, are projected to post an economic growth of 6.0 percent in terms of real GDP in 2005, slowing mildly from 7.2 percent in 2004 due to ''slower growth in the developed world, a near-term correction in global high-tech markets, high oil prices and China's efforts to cool its rapid economic growth.''

The bank said the Dec. 26 earthquake and tsunami in Asia will have ''only a limited impact'' on the East Asian economy, including the two most seriously affected countries Indonesia and Thailand.

China's real GDP growth is expected to decelerate from 9.5 percent in 2004 but remain high at 8.3 percent in 2005, the bank said.

The bank projects a growth of 5.9 percent for emerging East Asia in 2006 and 7.5 percent for China.

While the Chinese government has emphasized the need for more balanced growth, including more reliance on domestic consumption, the bank cautioned that a rise in China's net exports and current account surplus ''could, if it occurred on a large scale, exacerbate trade tensions, and, by adding to the buildup of foreign reserves, also complicate domestic monetary management.''

Calling for a flexible currency rate, especially in China, against this backdrop, the bank said the ''appropriate'' policy response of tightening monetary policy to cool down the overheating economy ''is however hampered by the present exchange rate linked to the U.S. dollar.''

The bank cited China's sharply increasing exports of garment and textiles after the World Trade Organization phased out the 30-year-old system of quotas on world trade of those products in January.

''Protectionist tensions have...risen, with the U.S. initiating safeguard inquiries in six product categories,'' it said.

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