Agence France Presse

Tokyo, June 15:

Asian Development Bank (ADB) president Haruhiko Kuroda said an easing of rigid currency regimes in China and other emerging economies should be gradual to avoid any drag on regional and global growth.

The ADB chief also said in a speech that political rows between the two Asian powers — Japan and China — should not deter the progress of an economic integration of the region. “An exchange rate adjustment should be made sooner rather than later, the pace of the adjustment should be gradual and it is up to the decision by the Chinese government,” Kuroda said. Kuroda stressed that emerging economies have fragile financial systems and thus government controls on the flow of funds should be maintained to cushion the shock of making exchange rates more flexible.

“Relaxing capital control should come after the revaluation of the renminbi, not before or at the same time,” Kuroda said, “There is an argument that you can first liberalise outflows of funds alone but inflows and outflows are delicately linked and that would be risky.”

Beijing has been under pressure from Washington to ease the peg of the yuan, or renminbi, to the dollar, which it says is helping Chinese exports and fueling a ballooning US trade deficit. China’s economic health is too important to falter for sustainable growth of the regional and global economies, said Kuroda, “Some kind of sequencing of capital account liberalisation is necessary to avoid a currency or capital account crisis.”

He said highly intertwined trade and investment between Japan and China should help the region integrate its economy despite bilateral political rows while countries elsewhere in the region had also made great progress in economic cooperation and integration.

“Rapprochement between China and Japan is needed for further deeper, stronger economic integration,” he said. However, economic ties have been dogged by other issues. Tokyo and Beijing have been locked in disputes over how Japan teaches its wartime aggression in history textbooks.

“Political leadership and will is important but that does not mean until rapprochement is achieved, no economic integration can be made,” Kuroda said, “Unlike Europe, Latin America or North America, the region lacks a coherent and comprehensive strategy for intensifying its efforts toward integration.”

However, C H Kwan, senior fellow at Nomura Institute of Capital Markets Research warned that while the current political rows would not derail a long-term regional integration, it is still a damper in the short term.

“For Japanese firms, the country risk of investing in China has increased,” Kwan said, “They can find alternative production bases in other Asian countries but cannot find an alternative big market.”

Kwan stressed the Japanese and Chinese economies account for 80 per cent of the regional gross domestic product. “They have to work close together as an axis towards integration.”