World Bank president: inflation a risk to recovery, weak China currency hinders policy options

World Bank president: inflation a risk to recovery

SINGAPORE — Asian economies must handle their monetary and currency policies carefully to avoid unleashing a wave of potentially destabilizing inflation, World Bank President Robert Zoellick said Friday.

The U.S. and European economies, which are barely starting to recover from the global meltdown, are less at risk, but in Asia the massive liquidity flowing into regional markets could push asset prices up dangerously high, Zoellick told a business forum on the sidelines of the Asia-Pacific Economic Cooperation forum.

“In this region some care must be taken because as we get recoveries … we could see inflation or some flow into commodities markets or certain asset price markets,” Zoellick said.

Stimulus spending and loosened credit and monetary policies have helped spur a recovery in the region, especially in India and in China, which clocked growth at 8.9 percent in the third quarter.

Zoellick noted that Asian central banks, which normally take their cues from the U.S. Federal Reserve, are doubly reluctant to raise interest rates to fight inflation because that will likely push the values of their currencies higher — weakening the potential for growth in their exports by making them less competitive.

Interest rate hikes in the U.S. are not expected in the immediate future out of fears they could threaten the incipient recovery at a time when jobless rates remain at their highest in more than 26 years.

“If the Federal Reserve keeps interest rates low and they keep interest rates low you’re going to see this danger I think increase in potential,” Zoellick said.

Such concerns have sharpened, especially in China, in recent months given the 74 percent rise in the Shanghai Composite Index share benchmark since the beginning of the year. Real estate prices and commodity prices have also rallied in recent months.

“We are at the stage of the recovery where confidence is important,” Zoellick said. “If you have asset bubbles that are not properly dealt with, then that could in turn undermine confidence in 2010, which is the year I’m more concerned about,” he said.

Currency issues remain another daunting problem for Asian economic planners, given the weakness of the U.S. dollar and controls on the Chinese yuan that keep its value linked to the American currency, Zoellick said.

Finance ministers gathered in Singapore for the regional APEC summit endorsed monetary policies based on flexible exchange rates, but downplayed criticism of Chinese policies that some say keep the yuan artificially low, giving the country’s exporters an advantage in overseas markets.

The yuan is in a more competitive position than other currencies and that makes it more difficult for other countries to adjust their monetary policy, Zoellick said.

Beijing has pledged to gradually allow the yuan’s value to float more freely, but it also has stressed its reluctance to make rapid moves that might pressure its exporters or developing financial system.

“If some countries are trying to make sure their currencies keep down and stop their exchange rate from appreciating, that will put pressure on all the others,” Zoellick said.