GLOBAL ECONOMY-W. Bank blames U.S. for unruly capital flows

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

* Asia urged to learn lessons of 1997 crisis in taming
flows

* We will not devalue our way to prosperity, Geithner says

By Stanley White and Jim Christie

TOKYO/ PALO ALTO, Calif., Oct 19 (BestGrowthStock) – Surging
capital inflows threaten Asia’s economic stability, the World
Bank warned on Tuesday, a day after U.S. Treasury Secretary
Timothy Geithner sought to draw the venom from a global row
over currencies by vowing not to devalue the dollar.

The World Bank buttressed the argument made by China and
others that U.S. policies are sending a wave of cash flowing
into higher-yielding emerging markets, undermining their export
competitiveness and pumping up inflation and 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 economist for Asia-Pacific, told
reporters in Tokyo.

Nehru, presenting a semi-annual report, urged policymakers
to learn the lessons of the 1997/98 Asian financial crisis,
when an influx of footloose global capital inflated property
and equity prices, only for them to collapse when the money
flows reversed.

“The authorities in East Asia need to take adequate
precautions to ensure that they do not repeat the same mistake
twice in slightly over a decade,” the report said.
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Currency tensions map: http://r.reuters.com/jec96p

PDF report on currencies:
http://r.reuters.com/gez77p Related stories

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World Bank: Risks for Asia from capital
flows[ID:nTOE69I02D]

Graphic on trade weighted fx: http://r.reuters.com/qun86p

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While capital controls were not very effective in
controlling long-term investment flows, Asian countries had an
array of instruments to deal with rising inflows, the World
Bank said.

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

Foreign investors in Brazil will also have to pay more tax
to trade currency derivatives, blamed in part for driving up
the real, the country’s currency, to a two-year high.

“Our objective is to reduce foreign investment into
Brazil,” Finance Minister Guido Mantega told reporters in Sao
Paulo. [ID:nN18280200]

YUAN VS DOLLAR

Strains over the constellation of exchange rates needed to
put global growth on a more solid, sustainable footing are
likely to dominate a meeting of finance ministers of the Group
of 20 major economies in South Korea starting on Friday.

The dispute boils down essentially to the exchange rate of
the yuan, also known as the renminbi.

The United States, supported by most economists, believes
Beijing is unfairly holding the yuan down to give its exporters
an advantage in global markets.

This is causing a broader misalignment of global
currencies, Washington contends, because other developing
countries are reluctant to lose competitiveness versus China by
permitting their own currencies to appreciate in isolation.

Speaking in Palo Alto, California, 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, which I think they
acknowledge, and it’s better for them, and of course very
important for us, that it move. 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.

China says a spike in the yuan would drive many exporters
to the wall, destroying millions of jobs, but would do nothing
to address what it sees as America’s deteriorating
competitiveness and shortfall in savings.

“We must try to minimise any possible negative impact in
further exchange rate reform,” a Chinese central bank spokesman
said in remarks reported on Tuesday. [ID:nTOE69I01C]

“We must make sure that the currency movements are
controllable and avoid any possibility of over-adjustment of
the yuan exchange rate driven by market forces,” he told the
People’s Daily, the mouthpiece of the ruling Communist Party.

True to its word, China let the yuan drift slightly lower
on Tuesday for the second day in a row following a relatively
brisk 2.5 percent rise against the dollar since the end of
August. [ID:nTOE69I00Y]

RETURN OF STRONG DOLLAR MANTRA

China’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 as part of
President Barack Obama’s drive to double U.S. exports within
five years.

Geithner flatly rejected this charge.[ID:nN18291636]

“It is very important for people to understand that the
United States of America and no country around the world can
devalue its way to prosperity, to (be) competitive,” he said.
“It is not a viable, feasible strategy and we will not engage
in it.”

But the treasury chief said the United States needed to
“work hard to preserve confidence in the strong dollar” — his
first utterance of the mantra “strong dollar” since February —
by maintaining growth and restoring budget discipline.

Geithner said he had delayed a report due last Friday into
whether Beijing manipulates the value of the yuan to win time
to drum up support within the G20 for “improvements” in the
currency policies of China and other emerging economies.

This week’s G20 finance ministers’ meeting in Gyeongju
precedes a summit of the group in Seoul on Nov. 11-12.

Canadian Finance Minister Jim Flaherty said he hoped the
meetings would lead to increased currency cooperation.

“This is important so that we avoid the kinds of
retaliatory actions that nations can take where they feel that
they are aggrieved by the policies of particular countries,” he
told reporters in Ottawa. [ID:nN18274126]

Investors are alert to the risk of a descent into
tit-for-tat protectionism, but, for now at least, many are
confident that policymakers will succeed in averting conflict.

“We expect international portfolio flows to continue to
create rising tension on asset markets over the next several
months, but we do not believe we are as yet at the brink of
‘currency wars’,” Ray Farris and Kasper Bartholdy, foreign
exchange strategists at Credit Suisse in London, said in a
note.
(Writing by Alan Wheatley in Beijing; Editing by Neil
Fullick)

GLOBAL ECONOMY-W. Bank blames U.S. for unruly capital flows