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Hot money a huge challenge to recovering economy: Chinese official

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Hot money a huge challenge to recovering economy: Chinese official
Han Hwa-yu and Staff Reporter 2011-06-08 15:17 (GMT+Cool

Chinese financial regulatory body chief Liu Mingkang warned hot money and liquidity will force emerging economies to raise their interest rates.

The chairman of the China Banking Regulatory Commission (CBRC), Liu Mingkang, has warned that emerging economies may be forced to raise interest rates to deal with persistent inflationary pressure. This could trigger huge amounts of hot money to move to other destinations, he added, noting that the sharp reversals could negatively impact a global financial system and economy still in recovery.

In an interview with Study Times, the official newspaper of the Central Party School of China's Communist Party, Liu said that if inflationary pressures and the threat of asset bubbles continued to increase, emerging economies may be forced to raise interest rates to deal with stagflation (slowing economic growth combined with inflation). He noted that currently Brazil, India, Russia, Argentina and Vietnam are struggling with runaway consumer prices.

While the global economy has shown some signs of recovery, Liu noted that the US economic recovery has been modest. Europe is not faring any better: the sovereign debt crisis and unemployment are getting worse. Japan too is reeling from multiple disasters -- the earthquake in March followed by a tsunami and an ongoing nuclear crisis. Political unrest in the Middle East and North Africa was also generated investor uncertainty.

"All these developments point to the fact that the financial crisis is far from over," Liu added.

While China may have survived the financial crisis, its housing loans and the local government lending platforms could still cause problems for the economy, he added, noting that financial regulators need to adopt measures to limit credit risks and cool an overheated housing market in China.

Sharing Liu's concern over surging inflation, Asian Development Bank president Haruhiko Kuroda said that Asian countries are facing growing pressures from inflation and massive capital inflows. Allowing more flexibility in the foreign exchange rate would be the best method to cope with these issues, he added.

Echoing that sentiment, US Treasury Secretary Timothy Geithner said at the recent International Monetary Conference in Atlanta that reforming China's foreign exchange rate system would be in the best interests of the global and American economy. Both Kuroda and Geithner support a revaluation of the Chinese yuan.

According to a report released June 7 by Standard Chartered Bank, China's central bank could let the yuan trade within a wider range of 1% in the "next few weeks." The current trading band is 0.5%.

The report also said that China would probably not significantly raise the value of the currency in one step.

Currency dealers noted that while poor US economic data, the declining value of the US dollar and inflows of hot money into Asia were behind gains in Asian currencies, China is planning to deliberately allow the yuan to appreciate to rein in soaring inflation.




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