Tight yuan worries Asians

BASEL - China needs to take more steps to loosen its currency regime, says the International Monetary Fund managing director.

Rodrigo Rato says that although China is to take fresh steps towards allowing markets to set some rates for the yuan within its tightly managed floating rate system, more needs to be done.

Top central bankers are meeting in Switzerland to discuss the outlook for emerging markets this year, with Asian countries worried upward pressure on their currencies compared with China's will hurt otherwise strong growth prospects.

"We see the importance of the Chinese Government and the Chinese authorities to make more use of that flexibility and to make their currency a clearer reflection of the market forces," Rato said.

Currencies, including the Chinese yuan, are on the agenda for the global economy discussion among central bankers from top industrial and emerging nations, who meet six times a year at the Bank of International Settlements in Basel.

Many Asian countries are enjoying strong growth, but are worried that China's tightly managed yuan trading band, a weaker US dollar and strong investor demand for Asian assets are putting too much upward pressure on their currencies, which could threaten their exports and growth.

South Korea vowed to stabilise the market after its currency hit an eight-year high at 985.1 last week, and has already risen 3 per cent this year.

Taiwan and Singapore already have sold US dollars to counter a month-long rally in their currencies.

And Japan's Vice-Finance Minister, Hiroshi Watanabe, hinted at intervention by saying the yen's advance was "rough". The US dollar has dropped 1.5 per cent against the yen this year alone.

But Bank of Japan Governor Toshihiko Fukui said he did not view his currency movement as too rapid.

"We are seeing perhaps some unwinding of carry trades ... but not too much volatility," Fukui said.

In the carry trade, investors borrowed cheaply in Japan, which pursues a zero interest-rate policy with liquidity injections to combat stubborn deflation.

Japan is expected to end its liquidity injections this year.

Overall, Argentina's Governor, Martin Redrado, said central bankers reviewing the health of emerging market economies had concluded they were in good condition.

"Most of the countries in the emerging world have a fiscal surplus and a current account surplus."

- REUTERS