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China PBOC Says World Recovery Continuing,Warns On Downgrades

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Friday, April 2, 2010 - 05:46
China PBOC Says World Recovery Continuing,Warns On Downgrades

BEIJING (MNI) - Surging debt levels in major economies such as the U.S. and U.K. raise the threat of sovereign credit rating downgrades, the People's Bank of China warned Friday.

The central bank's assessment was among the risks highlighted in its latest annual review of the global financial markets, which gave a broadly upbeat forecast for the year ahead.

But it warned of ongoing and fresh difficulties as the world continues to recover from the devastating recession of late 2008 and early 2009.

"Because of continually expanding public debt, the sovereign credit ratings of major economies, including the U.S. and U.K., face downgrade risks," it said.

The report was prepared by the international financial market team of the Shanghai branch of the central bank, headed by Vice-Governor Su Ning.

The central bank also said that the dollar index could see a "technical rebound" this year, but warned that high deficits and a recovering world economy will act to cap any upside.

The PBOC said that a key risk will be the exit of the world's major economies from counter-crisis stimulus measures.

"The world economy in 2010 is expected to continue 2009's recovery momentum but because of exit strategies and increasing sovereign debt risks with some countries, we cannot rule out the possibility of ups and downs in the recovery process," the bank said.

An uneven global economic recovery presents difficulties in coordinating the timing and manner of exit strategies, the PBOC said, urging major central banks to "fully consider the impact of their exit strategies to avoid sharp volatility in exchange rates."

It warned that the U.S. economic recovery will continue in 2010 but will be hampered by high unemployment, tightening credit conditions and a sluggish property market. The eurozone economies will see only a slow recovery in 2010 while Japan's economy is set to continue to improve this year.

The bank did not provide more specific growth forecasts.

The bank said that the dollar index could see a "certain technical rebound" this year after 2009's sharp fall but warned that a low interest rates, a high fiscal deficit, a widening current account deficit in the United States and rising risk appetites among global investors will cap any upside.

"However, you can't rule out dollar strength for certain periods because of a stronger U.S. economic recovery, an earlier-than-expected Federal Reserve rate hike and the sovereign debt risks of eurozone countries," the PBOC said.

It said that oil prices are likely to be rangebound this year at the levels seen at the end of 2009 while there is only limited upside room for gold prices, which are likely to remain rangebound at high levels.

Basic metals prices will also hover at high levels this year due to the fast recovery of emerging economies.

The central bank also said that it will continue to push forward the internationalization of the yuan and gradually loosen restrictions on cross-border capital flows. It did not provide any details about its plans.

The bank's outlook is in line with the latest statement from its Monetary Policy Committee, released Wednesday, which noted "increasing postive changes to the global economy. The recovery trend of our country's economy has further consolidated,"

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