Surging capital inflows threaten Asia’s economic stability, the World Bank warned yesterday, a day after US Treasury Secretary Timothy Geithner sought to draw the venom from a global row over currencies by vowing not to devalue the US dollar.
The World Bank buttressed the argument made by China and others that US policies are sending a wave of cash flowing into higher-yielding emerging markets, undermining their export competitiveness and pumping up inflation and asset bubbles.
“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 bank’s chief economist for Asia-Pacific, told reporters in Tokyo.
Nehru, presenting a semi-annual report, urged policymakers to learn the lessons of the 1997-1998 Asian financial crisis, when an influx of footloose global capital inflated property and equity prices, only for them to collapse when the money flows reversed.
“The authorities in East Asia need to take adequate precautions to ensure that they do not repeat the same mistake twice in slightly over a decade,” the report said.
While capital controls were not very effective in controlling long-term investment flows, Asian countries had an array of instruments to deal with rising inflows, the World Bank said.
“If this liquidity abundance is sustained and increases, I think they are going have to take further action,” Nehru said.
Thailand introduced a withholding tax on foreign purchases of government bonds last week, and Brazil on Monday increased an existing tax on foreign bond buyers to 6 percent from 4 percent.
Foreign investors in Brazil will also have to pay more tax to trade currency derivatives, blamed in part for driving up the real, the country’s currency, to a two-year high.
“Our objective is to reduce foreign investment into Brazil,” Brazilian Finance Minister Guido Mantega told reporters in Sao Paulo.
Strains over the constellation of exchange rates needed to put global growth on a more solid, sustainable footing are likely to dominate a meeting of finance ministers of the G20 major economies in South Korea starting on Friday.
The dispute boils down essentially to the exchange rate of the yuan.
The US, supported by most economists, believes Beijing is unfairly holding the yuan down to give its exporters an advantage in global markets.
This is causing a broader misalignment of global currencies, Washington contends, because other developing countries are reluctant to lose competitiveness versus China by permitting their own currencies to appreciate in isolation.
Speaking in Palo Alto, California, Geithner said he believed China would continue to let the yuan rise to aid the rebalancing of its -economy away from exports and toward domestic growth.
“You can’t know how far it should go. What you know now is that it’s significantly undervalued, which I think they acknowledge, and it’s better for them, and of course very important for us, that it move. And I think it’s going to continue to move,” Geithner said.
China would endorse that assessment. The disagreement arises over the pace of adjustment.
China says a spike in the yuan would drive many exporters to the wall, destroying millions of jobs, but would do nothing to address what it sees as the US’ -deteriorating competitiveness and shortfall in savings.
“We must try to minimize any possible negative impact in further exchange rate reform,” a Chinese central bank spokesman said in remarks reported yesterday.
“We must make sure that the currency movements are controllable and avoid any possibility of over-adjustment of the yuan exchange rate driven by market forces,” he told the People’s Daily, the mouthpiece of the Chinese Communist Party.
True to its word, China let the yuan drift slightly lower yesterday for the second day in a row, following a relatively brisk 2.5 percent rise against the US dollar since the end of August.
China’s big fear is that Washington, having largely exhausted fiscal and monetary stimulus, is resorting to benign neglect of the US dollar to galvanize its economy as part of US President Barack Obama’s drive to double US exports.
Geithner flatly rejected this charge, saying: “It is very important for people to understand that the United States of America and no country around the world can devalue its way to prosperity, to [be] competitive. It is not a viable, feasible strategy and we will not engage in it.”
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