GLOBAL ECONOMY-China ups rates while rich world stays loose

* China raises key rates by 25 bps

* Geithner: We will not devalue our way to prosperity

* World Bank blames loose U.S. policy for capital inflows

* WTO chief sees risk of protectionism from FX disputes

* Dollar index rises to day’s high vs basket

By Aileen Wang and Stanley White

BEIJING/TOKYO Oct 19 (BestGrowthStock) – China unexpectedly raised
interest rates on Tuesday, a day after U.S Treasury Secretary
Timothy Geithner vowed Washington would not devalue the dollar
for its own advantage.

The 25 basis point rate rise by the People’s Bank of China
— the first in nearly three years — took markets by surprise
and pushed the dollar to the day’s high against a currency
basket. [ID:nSGE69I0HU] [FRX/]

Some analysts said the tightening, following Geither’s
comments, could suggest a deal between Beijing and Washington
on easing foreign exchange tensions, which have prompted
warnings of economic instability and protectionism. Others said
China’s move was domestically focused as inflation rises.
[ID:nLDE69I19E]

“China always acts in China’s interest, and this is clearly
in China’s interest,” said Andrew Busch, a foreign exchange
strategist with BMO Capital Markets in Chicago.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphics package on currencies: http://r.reuters.com/deh58p Graphic showing Asian equity market valuations: http://r.reuters.com/suc29p PDF report on currencies: http://r.reuters.com/gez77p Related stories: [ID:nLDE69308R] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

The United States believes Beijing is unfairly holding the
yuan down to give its exporters an advantage in global markets
and says other developing countries are reluctant to let their
own currencies strengthen as a result.

China counters that a faster rising yuan would do nothing
to address what it sees as America’s deteriorating
competitiveness and shortfall in savings while the prospect of
the Federal Reserve starting to print money again to revive a
struggling U.S. economy is likely to drive the dollar lower.

While China tightens, most of the advanced economies are
keeping a lead foot on the easing pedal. A top U.S. Federal
Reserve official said another round of asset purchases must be
large enough to spur recovery, and $100 billion a month may be
enough to achieve the necessary impact. [ID:nN19117919]

The Bank of Canada kept its benchmark interest rate
unchanged at 1 percent and cut its growth forecasts, suggesting
its next rate hike may be further off than investors had
anticipated. [ID:nN19118876]

The Bank of Japan will keep its interest rate near zero
until it can see prices stabilizing and would expand a cheap
loan program if economic conditions worsened, BOJ Governor
Masaaki Shirakawa told Japanese newspaper Asahi Shimbun.
[ID:nN19149800]

Earlier, the World Bank buttressed the argument made by
China and others that U.S. policies were sending a wave of cash
flowing into emerging markets, undermining their exports and
pumping up asset bubbles.

“We are seeing an effort by developing East Asia to deal
with the large amounts of liquidity driven in very large part
by the monetary policy easing in the United States,” Vikram
Nehru, the bank’s chief Asia-Pacific economist, said in Tokyo.

The World Bank urged policymakers to heed the lessons of
the 1997/98 Asian financial crisis, when an influx of hot money
inflated property and equity prices, only for them to collapse
when the flows reversed.

“The authorities in East Asia need to … ensure that they
do not repeat the same mistake twice in slightly over a
decade,” its semi-annual report said. [ID:nTOE69I02D]

PROTECTIONISM?

World Trade Organization Director-General Pascal Lamy said
governments had not resorted to trade barriers to protect jobs
in the wake of the global financial crisis but friction over
exchange rates risked undermining that achievement.

“For the moment it’s a risk, but it’s a risk that can be
dangerous for trade,” he told reporters, a fear shared by South
Africa’s finance minister. [ID:nLDE69I0JH]

Pravin Gordhan told a consumer council conference: “If we
carry on this road it could result in a trade war, and then
each country is going to put up barriers.”

Bank of England Governor Mervyn King said the world was
facing a dangerous trade war which could spark a 1930s-style
collapse unless policy makers can strike a “grand bargain” on
exchange rates, rules, for capital flows and realigning
domestic demand. [ID:nSLAJLE6FX]

Asian countries had an array of instruments to deal with
rising inflows in the short-term, the World Bank said.

Thailand introduced a withholding tax on foreign purchases
of government bonds last week, and Brazil on Monday increased
an existing tax on foreign bond buyers to 6 percent from 4
percent.

“If this liquidity abundance is sustained and increases, I
think they are going have to take further action,” Nehru said.

YUAN VS DOLLAR

Strains over exchange rates will dominate a meeting of
finance ministers of the Group of 20 major economies in South
Korea starting on Friday, before the group’s leaders meet in
Seoul on Nov. 11-12.

Geithner said he believed China would continue to let the
yuan rise to aid the rebalancing of its economy away from
exports and toward domestic growth.

“You can’t know how far it should go. What you know now is
that it’s significantly undervalued … and it’s better for
them, and of course very important for us, that it moves. And I
think it’s going to continue to move,” Geithner said.

China would endorse that assessment. The disagreement
arises over the pace of adjustment.

Beijing says a spike in the yuan would drive many exporters
to the wall, destroying millions of jobs, but would not tackle
fundamental problems within the American economy.

“We must … avoid any possibility of over-adjustment of
the yuan exchange rate driven by market forces,” a Chinese
central bank spokesman told the People’s Daily, the mouthpiece
of the ruling Communist Party. [ID:nTOE69I01C]

Beijing’s big fear is that Washington, having largely
exhausted fiscal and monetary stimulus, is resorting to benign
neglect of the dollar to galvanise its economy.

Geithner flatly rejected this charge. [ID:nN18291636]

“The United States of America and no country around the
world can devalue its way to prosperity,” he said. “It is not a
viable, feasible strategy and we will not engage in it.”
(Writing by Mike Peacock, Alan Wheatley and Emily Kaiser;
Editing by Ruth Pitchford and Chizu Nomiyama)

GLOBAL ECONOMY-China ups rates while rich world stays loose