The World Bank on Wednesday said China should revalue the renminbi and abandon the dollar peg in favour of a link to a basket of currencies.

It warned that without revaluation, speculative capital flows could destabilise economies in the region.

The bank, which has long called for greater currency flexibility in China and developing Asia, also said Malaysia should let its currency appreciate.

Homi Kharas, the bank's chief economist for the region, said there was no imminent risk of a financial crisis caused by currency speculators, like that in the late 1990s, but “very large volumes of money” flowing into the region threatened economic distortions.

He suggested that China link its currency to a foreign exchange basket. “It's really a question of timing, and timing depends on circumstances,” he said, adding that Malaysia should allow its currency to appreciate for the same reasons.

Shifting the peg to a basket of the dollar, yen, euro and other currencies might also help defuse growing protectionist pressures in the US. Finance ministers from the Group of Seven industrialised economies, led by the US, have upped the pressure on China to move immediately towards a more flexible currency regime.

Zhou Xiaochuan, the governor of the People's Bank of China, said at the weekend that foreign pressure might accelerate Beijing's so far undisclosed timetable to introduce greater exchange rate flexibility. But he gave no indication of when any change might come.

The World Bank predicted that economic expansion in east Asia, excluding Japan, would slow to 6 per cent this year from 7.2 per cent in 2004 due to sluggish global demand, higher oil prices and efforts to curb China's rapid growth rates. The bank predicted China would achieve a soft landing, with the economy's growth expected to slow to 8.3 per cent this year and 7.5 per cent in 2006 from 9.5 per cent in 2004.

But Mr Kharas said that the bank remained “gun shy” about its forecast, because it had been predicting a soft landing for some time. “In China, the authorities will need to find a way to make domestic assets more expensive for foreigners. In other countries, there is room to expand investment and consumption to counter slowing world demand,” said Mr Kharas.

The lifting of quotas on textile exports from China would probably increase China's trade surpluses in the short term, contributing to the world's sizeable economic imbalance, he added.

The region had a chance to undertake more structural reforms in the financial sector and capital markets, because high economic growth rates after 2001 had meant stronger finances for local governments, banks and companies, he said.

The bank said that growth remained uneven across Asia, but regional economies were achieving more balanced growth as increased consumer spending and investments reduced dependence on exports.

Get alerts on Asia-Pacific when a new story is published

Copyright The Financial Times Limited 2022. All rights reserved.
Reuse this content (opens in new window) CommentsJump to comments section

Comments have not been enabled for this article.

Follow the topics in this article