UPDATE 3-World Bank: capital flows pose E.Asia bubble risk

* Capital inflows a risk to E.Asian economies

* World Bank sees 2010 E.Asian GDP up 8.9 pct

* Unsterilised intervention poses inflation risks
(Adds quote from report in paras 3-4)

By Stanley White

TOKYO, Oct 19 (BestGrowthStock) – The World Bank warned that rising
capital flows to East Asia are fanning fears of asset bubbles and
authorities need to be careful not to repeat the mistakes of the
Asian financial crisis more than a decade ago.

Asian currencies are appreciating as low yields in developed
countries drive capital into the region, the development lender
said on Tuesday. This could fan inflation, lead to asset bubbles
and harm the banking sector.

“Larger inflows combined with ample domestic liquidity and
rising confidence have boosted stock markets, real estate prices
and other asset valuations in some countries, precipitating fears
of a new bubble,” the report said.

“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.”

Intervention to slow currency gains has had limited success
and uncoordinated intervention is only adding to global
liquidity, the World Bank said.

It added that capital controls were not very effective in
controlling long-term investment flows.

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

Currency tensions map: http://r.reuters.com/jec96p

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

For full list of related stories, click [ID:nLDE69308R]

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Group of 20 finance ministers, meeting in South Korea on
Friday, will grapple with the global currency system as developed
and emerging countries trade barbs over competitive devaluation.
[ID:nN15232845]

Asian countries have a mix of instruments available to deal
with rising inflows, such as adjusting monetary policy,
withdrawing stimulus and regulating the banking sector to prevent
careless borrowing and lending, Vikram Nehru, the World Bank’s
chief economist for Asia-Pacific, told reporters on Tuesday.

MIX OF INSTRUMENTS

There is some evidence that capital flows to East Asia are
becoming more short-term, Nehru said, but he was confident that
Asian governments would not allow inflows to become so short-term
that they could reverse quickly, as they did in the 1997 Asian
financial crisis.

“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,” Nehru said.

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

Policymakers need to be careful that unsterilised currency
intervention does not lead to inflation, he added, as it would
increase the money supply.

The developing economies of East Asia will grow 8.9 percent
in 2010, the World Bank said in its semi-annual East Asia and
Pacific Economic Update report.

That was raised from 8.7 percent growth projected earlier,
reflecting a recovery in trade and private consumption.

Excluding China, developing East Asia will expand 6.7 percent
this year, up from its previous forecast of 5.5 percent.

“Encouragingly, the private sector is once again becoming the
engine of growth, confidence is returning, and trade flows have
returned to precrisis levels,” the report said.

“The return of large capital inflows to the region, combined
with rising inflationary pressures and climbing asset prices,
presents an emerging policy challenge and a growing risk to
macroeconomic stability.”

For 2011, East Asian growth will slow to 7.8 percent, less
than an earlier forecast of 8.0 percent growth, because growth in
the major economies is sluggish and emerging economies are
withdrawing stimulus, the Washington-based lender said.

Strong expansion in private consumption and a recovery in
external demand are supporting East Asian growth, the World Bank
said in the report. But lacklustre growth in the developed world
and tightening measures to slow inflation mean the pace of Asian
growth will moderate, the report said.

For China, inflation is likely to rise in the short term, but
wage growth is near historical averages and is unlikely to cause
an inflationary spiral, the report said.

Since its economy is operating near full capacity and there
are concerns about nonperforming loans in the banking sector,
China needs to withdraw expansionary monetary policy, the report
said.

China should also rebalance its growth from industry and
investment by placing more emphasis on services and consumption,
the World Bank said.

Middle-income countries, such as Indonesia and Thailand,
should encourage innovation and invest in human capital to move
to high-income status, the bank said.
(Editing by Edmund Klamann)

UPDATE 3-World Bank: capital flows pose E.Asia bubble risk