SHANGHAI: The International Monetary Fund (IMF) warned yesterday that Asian economies are at risk of overheating as strong capital inflows increase inflationary pressures and raise the risk of damaging bubbles.
It urged regional leaders to return to 'more normal' monetary policies after the global financial crisis, and increase the flexibility of their exchange rates to counter speculative funds flowing into their economies.
'For China, like in other economies in the region, the risk is to ensure that the boom we see in asset flows does not, like in the past, lead to a cycle of boom and bust,' Mr Anoop Singh, director of the IMF's Asia-Pacific department, told a news conference.
In its latest report on the regional outlook, the IMF said brighter economic growth prospects and widening interest rate differentials with developed economies 'are likely to attract more capital to the region'.
'This could lead to overheating in some economies and increase their vulnerability to credit and asset price booms with the risk of subsequent abrupt reversals,' the report said.
The IMF raised its growth forecasts for Asia to 7.1 per cent for both this year and next, higher than its prediction last week when it estimated regional economies would expand an average 6.9 per cent this year and 7 per cent next year.
But the fund warned that export-driven Asia remains vulnerable to a slower-than-expected recovery in the West, and urged governments to reduce their reliance on overseas shipments and boost domestic consumption.
'It will be important to implement reforms that boost the productivity and the competitiveness of the services sector,' IMF senior economist Olaf Unteroberdoerster told reporters.
The IMF said Asian policymakers need to safeguard against the build-up of imbalances in asset and housing markets caused by 'excess liquidity', and one way to do this was to adopt more flexible exchange rates.
'Letting the exchange rate appreciate can forestall short-term inflows,' the fund said, without specifically referring to China.
The IMF said last week a stronger yuan was 'essential' for both the Chinese and world economies, heaping more pressure on Beijing to revalue its currency, which has been effectively pegged at 6.8 to the US dollar since mid-2008.
Critics say the policy has given Chinese manufacturers an unfair advantage by making their exports cheaper.
Source: Straits Times, 30 Apr 2010