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NEWS UPDATES Asean Affairs    20  November 2010

Weak yuan may hurt region

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Emerging Asian giants China and India are set for further high growth, but the weakness of the yuan is a grave threat to emerging economies in the region, the OECD said on Thursday.

The South Korean economy is also set to expand at a brisk pace, but Japan’s economy will slow significantly, the OECD said in its six-month outlook for leading economies.

The OECD’s chief economist Pier Carlo Padoan told a press conference on the report that emerging countries were suffering from the weakness of the yuan.

“This might, paradoxically, lead to a disintegration in Asia,” he said.

“China has been a driver of growth in the region, but if exchange rates diverge too much I see a threat not just to global trade, but especially to Asian trade.”

With a realignment of global trade balances and currencies top on the agenda of world leaders, the OECD advised China that an appreciation of the yuan would also help stabilize its economy.

“The stability of the domestic economy would be enhanced if exchange rate policy were more oriented to allowing an appreciation against a basket of currencies,” the Organisation for Economic Cooperation and Development said.

The United States and others have contended that China has kept its currency artificially low against the dollar to boost exports, a charge that Beijing denies.

China has recently shown more concern about inflation, but the OECD forecast that Chinese consumer price inflation should stabilize at about 3.0 percent.

Despite the removal of stimulus measures, the Chinese economy is forecast to show growth of 10.7 percent this year and then slowing to 9.7 percent in the next two years as domestic demand increasingly fuels expansion.

In Asia’s other major emerging economy, India, growth should rebound to 9.1 percent this year, slow to 8.2 percent next year and then climb to 8.5 percent in 2012.

Although the pace of the recovery in South Korea, a member of the OECD club of industrialized nations, has eased slightly in the second half of this year, the country is still in line to post 6.2 percent growth this year.

Encouraging Seoul to raise interest rates to contain inflationary pressures and undertake structural reforms to underpin growth, the OECD forecast that South Korea’s economy will expand by 4.3 percent next year, and by 4.8 percent in 2012.

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