A global realignment of currencies is needed, covering not only fast-growing Asian economies but also commodity producers, the Asian Development Bank president said yesterday.
Haruhiko Kuroda told Emerging Markets that a new global currency agreement is needed, involving the G3 currencies (the dollar, the euro and the yen), plus those of the emerging Asian economies and of commodity producers.
Shifting attention from the yuan,which has been a focus of interest at the annual meetings, Kuroda argued that without such an agreement the most dynamic emerging economies will face intense inflationary pressures that could be difficult for them to deal with.
These economies will continue to grow much more rapidly than those of the G3. Unless they accept appreciation of their currencies, they will have much higher inflation, he told Emerging Markets.
His concern was echoed by Anoop Singh, director of the IMFs Asia and Pacific Department, who told Emerging Markets that Asian economies need to accept currency appreciation as part of a package of reforms aimed at economic rebalancing.
Kuroda accepted that the yuan is among the Asian currencies that need to appreciate. I personally think that the Chinese yuan is undervalued, but by how much is difficult to say, he said.
But he also drew attention to the Korean won, which he said had depreciated by 50% against the dollar, the yen and the euro after the financial crisis. It had risen since, but is still low.
Some Asian currencies including the Thai baht and the Malaysian ringgit, which have risen by 10% against the dollar this year have begun to adjust. But the process of currency alignment needs to go much broader and deeper, Kuroda argued.
A global realignment to be coordinated by the G20 and the IMF should embrace not only the currencies of Asias dynamic industrializing economies but also those of commodity producers in Asia, Latin America and Africa, he said.
Commodity producers have enjoyed strong improvement in their terms of trade in recent times, and can expect to enjoy further improvement in the future, he said. These countries too will face growing inflationary pressures unless they accept appreciation of their currencies, he said.
Economic rebalancing in China will take time, Kuroda said. Such adjustment will require not only realignment of Chinas currency but also the creation of social safety nets to spur consumption, as well as corporate governance reforms to bring about redistribution of income from the corporate to the household sector, he suggested.
Chinas economy will likely continue to grow at anything between 8-10% annually as productivity increase and so some adjustment of the nominal exchange rate of the yuan will be necessary, he suggested. But a one-shot realignment is not appropriate.
Kuroda warned against over-reliance by Asian emerging economies on capital controls to counter heavy inflows of capital from advanced economies. Such controls can distort both domestic and international investment decisions, he argued.