WB blames US for unruly inflows

“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 1997-98 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% from 4%.

Yuan vs dollar

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 Group of 20 major economies in South Korea starting on Friday.

The dispute boils down essentially to the exchange rate of the yuan,also known as the renminbi.

The United States,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.

However,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 America’s deteriorating competitiveness and shortfall in savings.

“We must try to minimise any possible negative impact in further exchange rate reform,” a Chinese central bank spokesman said on Tuesday.

True to its word,China let the yuan drift slightly lower on Tuesday for the second day in a row following a relatively brisk 2.5% rise against the dollar since the end of August.

Return of strong dollar mantra

China’s big fear is that Washington,having largely exhausted fiscal and monetary stimulus,is resorting to benign neglect of the dollar to galvanise its economy as part of US President Barack Obama’s drive to double US exports within five years. Geithner flatly rejected this charge.

This week’s G20 finance ministers’ meeting in Gyeongju precedes a summit of the group in Seoul on November 11-12.

Canadian finance minister Jim Flaherty said he hoped the meetings would lead to increased currency cooperation. “This is important so that we avoid the kinds of retaliatory actions that nations can take where they feel that they are aggrieved by the policies of particular countries,” he told reporters in Ottawa.

Investors are alert to the risk of a descent into tit-for-tat protectionism,but,for now at least,many are confident that policymakers will succeed in averting conflict.

“We expect international portfolio flows to continue to create rising tension on asset markets over the next several months,but we do not believe we are as yet at the brink of ‘currency wars’,” Ray Farris and Kasper Bartholdy,foreign exchange strategists at Credit Suisse in London,said in a note.