Currency tensions to flare at ASEAN meeting

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Currency tensions to flare at ASEAN meeting

Asian leaders faced with rocketing exchange rates and surging stock markets will raise the alarm at a regional summit this week over a "currency war" that threatens to destabilise their economies.

While China has kept a tight grip on the yuan, Japan and emerging Asian economies have seen their currencies soar against the US dollar, making their exports less competitive and inviting a massive inflow of foreign capital.

The 10-member Association of Southeast Asian Nations, which will meet in Hanoi along with the leaders of China, Japan, South Korea, India, Australia and New Zealand - or ASEAN+6 - has been urged to forge a united front on the currency tensions.

The United States, struggling with weak growth and high unemployment, has accused China of keeping the yuan artificially low.

Beijing in turn says the Federal Reserve's loose monetary policy risks undermining emerging economies, now grappling with an influx of hot money as investors seek higher returns amid low interest rates in Europe and the US.

Capital inflows push Asian currencies higher still and have led to steep gains in stocks and property prices, fuelling fears of higher inflation and speculative bubbles that could burst if the money exits as fast as it arrived.

"These issues need to be discussed in the context of ASEAN and ASEAN+6, where member countries could fashion a common approach to these regional challenges," the World Bank said in a report last week.

But coming up with a regional response at the three-day summit which begins Thursday could prove challenging.

"Yes, these countries will try to present a concerted front at the ASEAN," said Callum Henderson, head of foreign exchange research at Standard Chartered.

"But different countries don't necessarily have the same economic priorities and across the ASEAN and across Asia in general, you have very different economies."

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Henderson said trade-dependent Southeast Asian economies had probably more at stake in a currency war than Europe or the United States.

"Chinese foreign exchange policy is very important for the ASEAN, given that a number of ASEAN countries compete with China for third markets," he said.

Thailand has already moved to stem capital inflows after a 10 percent jump in the value of the baht over the past year, slapping a tax on foreigners investing in bonds.

And Singapore recently announced a tightening of monetary policy to curb inflationary pressures.

Finance ministers from the G20 agreed in South Korea at the weekend to "refrain from competitive devaluation of currencies" and aim for "more market-determined exchange rate systems".

But Deborah Elms, a trade expert at Singapore's Nanyang Technological University, said "ASEAN is not likely to act in a coordinated fashion" to fix its currency woes.

"Instead, individual countries will take steps to secure their own economic benefits to the extent that they can," she said.

Emerging nations, reluctant to impose measures that could spook markets, have limited weapons in their arsenal to curb the inflow of hot money.

Vishnu Varathan, Asia economist with Capital Economics, said ASEAN leaders were not expected to "go on the offensive" at the summit despite the presence of the main players in the currency drama.

"For ASEAN it's more about reacting and trying to assess what this means in terms of trade exposure and capital inflows," he said.

"What they can do is pose as a collective unit. They can stress that it is not in anyone's interest to try to indulge in beggar-thy-neighbour policies because no one will come out on top."

AFP

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