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Asia Must Avoid 'Distortions' in Handling Hot Money: ADB
Source: news.yahoo.com
Source Date: Saturday, October 30, 2010
Created: Nov 01, 2010

HANOI (AFP) – Developing Asian nations must carefully manage a massive inflow of foreign capital and avoid remedies that could create destabilising "distortions", the Asian Development Bank chief warned Saturday.

Haruhiko Kuroda told Asian leaders at a summit in the Vietnamese capital Hanoi that capital flows are one of two risks that regional economies face as they rebound from the global downturn that began in 2008.

His comments came shortly before the US Federal Reserve is expected to announce it will go into a second round of quantitative easing, injecting more money into the banking system to further stimulate the world's biggest economy.

The first risk is that the recovery in the developed economies could falter, Kuroda told presidents, prime ministers and a sultan, as well as US Secretary of State Hillary Clinton and the Russian foreign minister.

"The second risk is capital flows, which could complicate macroeconomic management," Kuroda said in a prepared speech made available to journalists.

"We must be prepared," he told his audience, which also included Chinese Premier Wen Jiabao.

Referring to Asian economies outpacing growth in the developed world, Kuroda said "faster growth and higher yields can draw excessive -- and potentially volatile -- capital flows into the region".

"Authorities are watching asset prices and exchange rates carefully, with several beginning to use well-targeted capital controls to limit speculation," he said.

"Care must be taken, however, not to create distortions."

Hammered by the financial turmoil that began in 2008, the United States, Japan and Europe are moving to weaken or cap their currencies in a bid to make their exports more competitive in the global market.

They have also injected more money into their banking systems to stimulate growth, with the Fed expected to announced a second round of quantitative easing when it meets from Tuesday to Wednesday.

But because growth in the developed world is anaemic and unemployment high, a large chunk of the money is heading to emerging markets, including in Asia, where it stands to gain better yields.

According to the Washington-based Institute of International Finance (IIF), net private capital flows to emerging economies are projected to reach 825 billion dollars this year, or more than two billion dollars a day, up from 581 billion dollars in 2009.

The massive inflow has nudged most Asian currencies higher, making their exports more expensive on the global market as the US allows the dollar to weaken and China keeps a tight rein on the yuan.

The influx has also led to steep gains in stocks and property prices, which have stoked fears of "bubbles" which could later burst if the money is withdrawn quickly, and prompted individual central banks to act to cool down their markets.

Philippine Finance Secretary Cesar Purisima, who is attending the Hanoi meetings, called for cooperation among developing states to fight the impact of the currency tensions.

"Our concerns as small countries is when the pendulum swings the other way around. What would happen to us -- and really this is something that we need to address as a group and not as a single country," he told reporters on Friday.

The IIF in a research note released in October urged policymakers to be careful about the international and domestic impact of the actions they take on their currencies.

A disorderly adjustment can cause "renewed strains in global financial markets and, possibly, igniting policy tensions and, possibly, protectionist measures between key economies," it warned.
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