China's limited currency flexibility hurts Asia: IMF

SINGAPORE (AFP) - China's limited currency flexibility is preventing countries in Asia from strengthening their currencies, contributing to a reserves buildup that is disrupting regional growth, a senior International Monetary Fund official said here Tuesday.

Domestically, China needs to allow greater exchange-rate flexibility to curb rapid credit growth and excessive investment, said David Burton, director of the IMF Asia and Pacific Department.

And China's inflexibility in its yuan currency constrains other countries in the region, he said in a text prepared for delivery at the Singapore Press Club.

"The still limited flexibility in China makes it more difficult for other countries to allow their exchange rates to strengthen. And this has been reflected in continued substantial reserve buildups in some cases," he said.

"This can be both expensive, and also create difficulties for monetary management," he added.

Burton said that China, like other Asian countries, continues to rely heavily on net exports as an engine of economic growth.

While investment has grown rapidly in China, savings, particularly in the corporate sector, have grown even faster, he noted, leading to inadequate consumption that is threatening China's economic expansion.

"The need in China, therefore, is to reduce reliance on rapid investment growth as well as net exports, and to encourage consumption," he said.

"Greater exchange rate flexibility is also needed to give monetary policy scope to reign in rapid credit growth and constrain excessive investment."

Burton said the reforms to strengthen social safety nets, reorient public spending toward social areas, and improve financial intermediation were "urgently needed to help strengthen consumption."

Looking back to the Asian financial crisis 10 years ago, "almost to the day," Burton recalled that the central feature was a sudden reversal of investor sentiment and international capital flows.

However, he said, the roots of the crisis mainly were in financial and corporate sector weaknesses not fully apparent at the time.

"Ten years on, Asia is again the most dynamic region in the global economy. Rather than withdraw from globalization, Asia has continued to embrace it," he said.

He cited a wide range of reforms undertaken, from more flexible exchange-rates regimes in many countries to a buildup of substantial official reserves and inflation targeting.

Among the region's greatest challenges was imbalanced growth due to over-reliance on exports.

"Over time, greater reliance on domestic demand will be needed to assure a more balanced and sustainable pattern of growth -- as Asia's share of global exports rises, sustaining high rates of export growth will become increasingly difficult."