ADB warns of financial crisis repeat

Fixed rates for the yuan and other Asian currencies and soaring foreign reserves in the region may spark a financial crisis such as the one in 1997 that brought recessions to several Asian nations, the Asian Development Bank said.

Asia's reserves outside Japan rose 18 percent to US$1.3 trillion last year as the region's central banks bought US dollars to protect export-driven economic growth, the bank estimated in its annual Asian Development Outlook.

That's adding money to Asian economies that "might lead to unbridled domestic credit expansion and possibly create the conditions for a new Asian financial crisis," the ADB said.

Economic in the region excluding Japan may rise to 6.8 percent this year, from 6.3 percent last year, the bank said.

"The further accumulation of reserves risks domestic costs that could exceed benefits in terms of competitive exchange rates and credit rating upgrades that we've seen so far," said Robert Subbaraman, senior economist at Lehman Brothers Japan Inc.

"There is the risk that some countries may end up like China where there is too rapid credit and money growth," Subbaraman said.

The ADB report echoes warnings by the World Bank and International Monetary Fund last week that an overheating Chinese economy -- rapid growth followed by a sudden slowdown -- is a risk for economic growth across Asia and also suggests that China would benefit from greater currency flexibility.

"While originally the accumulation of reserves reflected the prudent behavior of policy makers, increasingly, however, it appears to be fueled by speculative market behavior stemming from rigidities in many of the region's exchange rates," the bank said.

The ADB said Asia's foreign reserves are mainly held in US dollars and Treasury bills that may lose value as the dollar depreciates.

"It may be an opportune time to reassess the policies underlying the large accumulation of foreign exchange reserves in the region," the report said.

China a key driver of trade growth within Asia, overheating of investment in the country "could have repercussions on export trade in many other Asian countries," the report said.

"Over the longer term, over-investment would result in a capacity overhang which would adversely affect the region."

China's makers also face challenges including reducing bad debts in the banking sector and restructuring state-owned enterprises. Successful handling of these, the ADB said, is "extremely important" for regional growth.

The bank's report noted that economies of Asia, excluding Japan, overcame uncertainties caused by the war in Iraq, high world oil prices, slow recovery in developed economies and an outbreak of the SARS virus to grow 6.3 percent last year.

China the single largest export market for economies such as South Korea's, Hong Kong's and Taiwan's, and a major export destination for countries in Southeast and South Asia.

"Intraregional trade will remain a major driver of growth in developing Asia over the next two years," the ADB report said. "Economic fundamentals of the region are strong."