Sunday, January 17, 2010

ADB Warns of Inflation in China and India

Sources: Inflation threat to China and India; Report on China, India, and Southeast Asia.

The inflation threat is growing in China and India, the Asian Development Bank ("ADB") warned at a regional forum, "Impact of Global Economic and Financial Crisis," held by ADB on January 14-15. According to the ADB, Asia excluding Japan will grow by 6.6 percent in 2010 and China is expected to grow by 8.9 percent. Reports prepared for the forum emphasize that China and India need to take actions to make sure that return to growth does not lead to inflation. As for south-east Asian economies, they are recovering faster than expected, but need to make financial, fiscal and structural adjustments in order to buffer themselves against future economic shocks, says the ADB.

According to a report on China, China is set to grow sharply this year as the global economy recovers, and policymakers need to introduce tightening measures to prevent overheating of the economy. China had come through the financial crisis due to past structural reforms and policy actions including its emergency stimulus package ($586 billion). However, China soon needs to consider measures such as reining in lending to head off the potential threat of an asset price bubble and inflation, says the report. Haruhiko Kuroda, the ADB's president, said that China's recent increase in bank reserve requirements was an "appropriate" action to prevent inflation.

A report on India says that India is set for a solid recovery this year, but needs to address problems of inflation and fiscal deficit. India's economy regained growth momentum relatively fast due to its stimulus actions, past reforms, banks' limited exposure to troubled parts of the global financial system, and its robust domestic consumption, says the report. In the latter part of 2009, however, there were signs of an increase in inflation and a worsening trade deficit. The report says that India has to improve its fiscal management (e.g., streamlining or replacing subsidies with more targeted measures and introducing a new fiscal management framework).

According to a report on southeast Asia, the countries recovered relatively quickly from the crisis and were much more resilient compared to the 1997-98 Asian financial crisis. However, the report warns that Indonesia still remains vulnerable to financial shocks. Indonesia needs to exit the accommodative monetary policy to avoid stoking inflation, but the exit strategy should be carefully timed so that it would not damage growth prospects, says the report.

Discussion: In the process of recovering from the global financial crisis, what kinds of policy coordination will be crucial among Asian countries?

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