Zhou Sees China Stimulus Scope, Zeti on Ringgit: Asia at the IMF

Asian policy makers who gathered in Washington for the International Monetary Fund’s spring meetings signaled readiness to preserve policy space, said the U.S. should get its impending interest-rate increase over with, and anticipated China’s growing influence in global currency markets and infrastructure development.

Here are highlights of their views, from comments by the central bank governor of the world’s No. 2 economy, one of Asia’s longest-serving central bank chiefs, the IMF’s mission chief for Japan, India’s top policy makers and the finance ministers of Asia and Southeast Asia’s most developed economies.

Monetary Policies and Economic Outlook

* China’s central bank Governor Zhou Xiaochuan said the nation has scope compared with others to ease its monetary policies, hours before the authority cut the reserve-requirement ratio for the second time this year.

“We have room in the reserve ratio and our interest rates are not zero yet,” Zhou said in a brief interview Saturday in Washington. “There is definitely room. But we need to adjust carefully. It doesn’t mean we will have to utilize it or fully utilize the room.”

In a statement at the Washington meetings, Zhou said that while China’s economic expansion is slowing, it’s still within a “reasonable range” and employment growth remains stable.

He reiterated that China will pursue “prudent” monetary policy and said it will adjust “adaptively” according to the economy and inflation, according to the statement.

On Sunday in China, the country cut the amount of cash lenders must set aside as reserves, stepping up stimulus after all.

* Malaysian central bank Governor Zeti Akhtar Aziz, who oversaw the country’s monetary and currency responses to the Asian financial crisis more than a decade ago, said while the global recovery “is so modest that it’s not going to fuel inflation,” a lack of price pressures shouldn’t prevent central banks from increasing rates to prevent imbalances.

Malaysia’s own rates are accommodative and conditions now allow the nation to maintain borrowing costs “at these levels,” she said in an interview.

The U.S. Federal Reserve, which is gearing up to boost its main rate for the first time since 2006, should act sooner rather than later, she said. “The earlier it happens, the better it would be,” Zeti said. “The volatility is the uncertainty of it, and the extent of it, and the timing of it.”

* Kalpana Kochhar, the IMF’s mission chief for Japan, said it’s become harder to estimate when the Bank of Japan will achieve its inflation target, suggesting the global fund is backtracking from its prediction of around 2017 or 2018.

“It’s just too uncertain for us to say x or y time,” Kochhar said in an interview. Uncertainties including oil prices, wage growth and Japanese companies’ potential use of cash holdings are making it hard to make a prediction, she said.

The exact time frame of when the target is reached is less important than the goal of “raising inflation in a durable manner,” she said.

* Global economic powers need to reassess what’s acceptable in monetary policies, Raghuram Rajan, Reserve Bank of India governor, said on a panel discussion. “In the past, direct currency intervention was a no-no,” yet today monetary policies that have the direct or indirect effect of moving currencies are accepted, because they’re seen as needed to boost growth domestically regardless of spillover effects, he said.

The IMF needs to play more of a role in judging policy, and “not allow the fig leaf of monetary intent” to determine whether a policy is good or bad, he said.

Impact of Fed Rate Increase

* Singapore Finance Minister Tharman Shanmugaratnam said the nation and emerging Asia are positioned “quite well” for a Fed rate increase.

“I don’t think serious analysts view Singapore facing some unwinding of some crowded trades” because the country has a very liquid market, “pretty sound fiscal policies” and a currency that’s been appreciating over the years, he said.

“The region has positioned itself quite well for this. If you look at Indonesia, Malaysia, Philippines, Thailand together, fiscal policy has been on a sound footing for some time, monetary policy relatively disciplined. There’s no big hole anywhere in the financial system.”

* Zeti said that fund flow reversals “have already commenced” in the run-up to the rate increase, and Malaysia is prepared for capital outflows resulting from the impending policy change. Asia as a region will also be resilient.

“Because we’re open, we’re affected, but we bounce back quite quickly,” she said.

China’s Growing Clout

* Zeti said having two or more drivers in the world financial system would be better for global stability, and the Chinese renminbi does have potential as an international reserve currency.

“I am still very positive that the euro will emerge as an important international reserve currency,” she said. The potential for the yuan to become one of them is “significant.”

* Both Zeti and Shanmugaratnam see a role for the China-led development lender, the Asian Infrastructure Investment Bank.

Asia has “immense” infrastructure demands, and “the U.S. should look at it as a complementary role rather than a competing role” to the World Bank, Zeti said.

“There’s now a recognition that the AIIB will be a win-win, not just for China or those who joined early, but for the global system,” Shanmugaratnam said. “If it does at the same time mean a little bit of competition, I would say that’s not a bad thing” as long as it’s not a race to the bottom in terms of standards, but a race to the top.

Undervalued, Weakening Currencies

* The IMF this month indicated it may be abandoning its long-held view that the Chinese exchange rate is undervalued.

“The market should be the judge of the renminbi’s value rather than us,” China’s Zhou said.

* Zeti reiterated that the ringgit is undervalued and does not reflect underlying fundamentals in the economy. The currency has lost 9.7 percent in the past six months, among the worst performers in Asia.

* Taro Aso, Japan’s finance minister, said the G-20 didn’t criticize the weak yen.

* Indian Finance Minister Arun Jaitley said India’s strength has kept the rupee in a stable range, and the country has a “comfortable road map” to double-digit growth.

“Considering the vast depth and size of the Indian market, our ability to absorb those shocks is far stronger,” he said at a Peterson Institute for International Economics conference. “Our dependence on our own domestic market has made us relatively more stable.”

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