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Economy/Central Bank Governors Meeting
July 28, 2007

Challenges from volatile capital flows
Asia's emerging economies are struggling to find ways of coping with adverse market volatility arising from fast flows of global capital, Reuters quoted Bank of Thailand Governor Tarisa Watanagase as saying on July 28.

Senior officials from South East Asian central banks meeting in Bangkok, hoped to seek the views of the International Monetary Fund on how to adjust policies in response to recent volatile capital flows experienced in the region, Tarisa said in a speech to regional central bankers.

"The increased volatility has posed challenges to central banks in maintaining monetary and financial stability," the governor said.

"The problems of volatile capital flows have become more intensified, and all of us are still in search of a long-lasting solution to cope with short-term adverse implications of large and volatile capital flows into our economies," she said.

Tarisa was addressing a meeting of governors of SEACEN, a research center set up by South East Asian central banks. Many Asian economies including those of India, China, Thailand and the Philippines, have seen a heavy influx of foreign capital inflows, putting upward pressure on their currencies and asset markets.

In Thailand, large foreign capital inflows to the stock market in the past month have buoyed Thai stocks and pushed the baht to 10-year highs against the dollar this month, prompting exporters to call for government assistance in shoring up their eroded competitiveness.

The Thai currency has risen about 7% against the dollar this year, despite active central bank intervention to slow its gains, after gaining nearly 14% in 2006.

In a speech prepared for delivery to a SEACEN function later on July 28, IMF chief Rodrigo de Rato urged China and other Asian countries to relax their currency policy regimes.

Rato said if China let its yuan currency find its value more freely, other Asian nations' currencies could appreciate without fear of losing exports.

"Greater exchange rate flexibility is not only in China's best interest but would allow other Asian countries to appreciate with less concern about competitiveness," he said. "There is also the possibility of such protectionism spinning out of control with disastrous consequences for the global economy," the IMF managing director said.

China manages the value of its yuan currency, also called the renmimbi, within a narrow range that the United States and many European countries maintain does not represent its fair value given China's rising global economic might.

Thai central bank governor Tarisa has been criticised by exporters for being ineffective in slowing the baht's rise despite her bank's efforts to ease capital controls this month.

"It is inevitable emerging market countries are more likely to exprience volatile capital flows than developed countries since their less developed financial markets and weaker institutions mean that large foreign capital flows can swamp them as well as reverse quickly," she said in the speech. Reuters


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