East Asia booming, but rising currencies a risk: World Bank

Agence France-Presse

Posted at Oct 19 2010 11:25 AM | Updated as of Oct 19 2010 11:21 PM

TOKYO - East Asia is leading the global recovery, but its success has attracted a surge of capital that has inflated currencies, spelling a risk to exports and future growth, the World Bank said Tuesday.

While the rebound remains sluggish in the United States, EU and Japan, emerging East Asia, led by China, is growing at near pre-2008 global crisis levels, with an expected real economic growth rate of 8.9% this year, it said.

"East Asia remains the fastest growing world region," said the bank, pointing out that sales of flatscreen TVs, automobiles and even Bordeaux wines in East Asia are now the largest for any region in the world.

The report on East Asia's developing economies -- which excludes Japan, South Korea, Singapore, Hong Kong and Taiwan -- said China remains the region's economic powerhouse, with projected growth of 9.5% in 2010.

However, confidence in developing East Asia has triggered a flood of liquidity in search of higher yields, said the World Bank in its latest East Asia and Pacific Economic Update report released in Tokyo.

"The large increase in inflows, driven by abundant global liquidity and low yields in advanced countries... has been mainly responsible for a substantial appreciation of exchange rates," the report said.

The surge in capital inflows has "caused exchange rates to appreciate strongly," the bank said, pointing out that in real effective terms, regional exchange rates are 10% to 15% stronger than before the crisis.

"Appreciating exchange rates so far have not crippled the recovery, but further appreciation will bear close watching," the report said.

"So far, export growth has remained robust, but with continued real appreciation of East Asian currencies, this growth could slow."

The World Bank report came as fears are rising of a "currency war", in which nations, seeking to export their way out of the downturn, are trying to cap or lower their currencies to make their exports more competitive.

While the dollar, the global reserve currency, has fallen, Japan, Switzerland and other countries have sold their local units to keep them from strengthening, while Brazil had also intervened, the report pointed out.

The bank said that "developed and developing countries worldwide are bent on avoiding stronger exchange rates, as concerns about weak foreign demand -- and a limited scope for exports to boost growth -- intensify."

The report urged regional debate at a Hanoi summit this month, saying "the issues need to be discussed in the context of ASEAN and ASEAN+6, where member countries could fashion a common approach to these regional challenges."

In the longer term, the report warned that "the rise in asset prices and potential bursts of related bubbles, especially when the share of speculative inflows has been high, could result in sudden stops and capital reversals."

Foreign cash has flooded into East Asian bonds, real estate and equity, with the Agricultural Bank of China posting the world’s largest initial public offering to date at $22.1 billion, the bank said.

The average real estate property price index for eight East Asian countries is about 17% above its level in early 2007, it said.

The World Bank report cautioned against East Asia's "increasing vulnerability to sudden stops, and possibly even capital reversals, once the global liquidity taps are turned off."