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World Bank president Robert Zoellick on Wednesday warned against the emerging risk of asset bubbles in Asia. He also cautioned that raising interest rates abruptly may lead to another economic downturn.
In an opinion piece in the Financial Times, published on Wednesday, Zoellick said, "Asset bubbles could be the next fragility as the world recovers, threatening again to destroy livelihoods and trap millions more in poverty."
"The combination of loose money, volatile commodity markets and poor harvests - such as occurred recently in India - could make 2010 another dangerous year for food prices in poor countries," he warned. Zoellick wrote asset prices can be more insidious than traditional product inflation, because they seem to be a sign of health. However, higher values lift the real economy, in turn sending the bubbles higher, he said.
"Waiting for bubbles to burst and then cleaning up the aftermath is now a new lesson of what not to do," the World Bank chief wrote. "But tightening interest rates too abruptly - especially where recoveries are weak, such as in the US and Europe - could trigger another downturn."
Citing the rate hikes by the Australian central bank, Zoellick said Asian countries may be under pressure to follow suit. That said, he cautioned that hiking rates while the Fed keeps its rates close to zero would cause Asian currencies to appreciate. Australia was the first nation in the G-20 to hike rates since the economic crisis.
"This would make their exports more expensive and decrease overseas sales, hurting recoveries based on exports," Zoellick wrote. Pointing to the competition from China, he said, "The renminbi is tied to a declining US dollar that makes Chinese goods cheaper to buy than those of Asian rivals."
Zoellick took note of the alternative approaches being tested by policy makers in Asia. Further, Zoellick called on North America and Europe to study the agenda that Australia and many Asian countries are starting to pursue. "To build confidence and opportunity for the private sector, the Asia-Pacific countries are advancing structural reforms - including in service sectors - to boost productivity and potential growth." According to him, such reforms will help these countries to compete even if their currencies appreciate.
"Debates about new financial regulatory structures should not distract governments from using tools they have to counter these emerging risks," Zoellick stressed. "The G20 had better put asset price bubbles and new growth strategies on its agenda. Otherwise, the solutions of 2008-09 could plant the seeds of trouble in 2010 and beyond."
The World Bank chief's warning comes as a Chinese press report said on Wednesday the country may raise banks' reserve requirements next year rather than interest rates to avoid an asset price bubble. If China increases interest rates ahead of the U.S. tightening monetary policy, that could cause more international capital to flow in, pushing up Chinese asset prices and pressuring the yuan to appreciate.
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