Asia Should Consider Regional Exchange-Rate Cooperation, ADB Unit Proposes

Asian economies should cooperate on exchange rates to manage capital inflows and boost regional trade as faltering recoveries in advanced economies threaten demand for exports, an Asian Development Bank unit said.

“Greater regional cooperation may allow the region’s economies to be more willing to appreciate currencies without fear of losing competitiveness to other economies, thus helping global rebalancing,” The Manila-based ADB’s Office of Regional Economic Integration said in its December Asia Economic Monitor released today.

Asian currencies have climbed in a range of 1.7 percent to 11.5 percent against the dollar this year, except for the Hong Kong currency, which is pegged to its U.S. counterpart. “Weak” growth in advanced economies in the next several years will lead to a difference in growth rates between Asia and the U.S. and Europe, sustaining the region’s currency gains and resulting in “long-lasting” capital inflows, according to the ADB report.

The ADB raised the 2010 growth forecast for developing Asia to 8.6 percent from its September estimate of 8.2 percent, the bank said in a separate note today. It kept the 2011 forecast at 7.3 percent.

While weak demand in the U.S., along with the sovereign debt crisis in Europe and deflation in Japan, is hurting prospects for Asian exports, efforts by the U.S. Federal Reserve to bolster growth also increases the risks of asset price bubbles and higher inflation in the region, the ADB office said.

Cheap Money

Fed Chairman Ben S. Bernanke said this week the economy is barely expanding at a sustainable pace and it’s possible the central bank may buy more bonds beyond the $600 billion announced last month to spur growth. Additional easing by the Fed may cause the dollar to weaken and spur capital flows to emerging economies, the Philippine central bank said yesterday.

“Commodity prices are rising due to cheap money, which could be inflationary and hurt consumption,” the ADB unit said. “Giving investors incentives to seek higher yields in riskier assets could create asset bubbles. Inflationary expectations could accelerate. And abundant liquidity could once again lead to inordinate capital flows, particularly to emerging economies, with possible destabilizing effects.”

Southeast Asian nations and Japan, South Korea and China can explore the possibility of regional exchange-rate cooperation and coordination “to effectively manage surging capital inflows to the region and better rebalance the sources of growth,” the ADB unit said.

Monitoring Zones

While “maintaining flexible exchange rates inter- regionally is an essential tool to manage potentially volatile capital flows and external shocks,” stable rates between Asian currencies would promote trade within the region, the ADB office said.

Regional exchange rate cooperation could start with less ambitious goals than the monetary union adopted in Europe, the unit said, suggesting an “informal reference or monitoring zones” for the region’s exchange rates to reduce “variability” over time.

Export growth will slow in Asia in 2011 on “subdued” demand from the U.S. and Europe, helping to reduce current- account surpluses in the region, the report showed.

China’s growth will moderate to 9.1 percent in 2011 from 10.1 percent this year as property prices cool and stimulus is withdrawn, the ADB office said.

Japan’s recovery will also ease as a strengthening yen and “persistent deflationary pressures” are hurting exports and weakening consumer spending, the ADB unit said. Economic growth will slow to 1.4 percent next year from this year’s 3.2 percent, it projected.

To contact the reporter on this story: Sophie Leung in Hong Kong at sleung59@bloomberg.net

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net

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