Export growth builds problems in emerging Asia-IIF

Frankfurt, May 8 (Reuters) Emerging Asian countries that have pursued export-led economic growth by curbing appreciation of their currencies have created problems for their central banks, a global commercial bankers' group said.

Slower overall growth has also resulted in many countries and difficulties in controlling liquidity in others, the Institute of International Finance also said in a report.

It called for reforms in emerging Asian countries to allow them to compete better in the global economy.

''Many governments appear to favour the expediency of export-led growth over advancing deeper structural reforms,'' said Charles Dallara, managing director of IIF which represents over 375 global financial services firms, in a press release.

The IIF also warned that China faces worsening protectionist pressures from the United States, even if it allows a slightly faster appreciation of its yuan currency in the coming year, as the IIF expects.

''The dependence on exports and strong balance of payments have put central banks in the dilemma of limiting exchange rate appreciation to protect external competitiveness while coping with the liquidity arising from market interventions,'' said Gregory Fager, IIF director for Asia and the Pacific Basin.

This problem was particularly evident for Thailand's central bank, which recently resorted to controls on capital inflows to stem upward pressure on the baht currency, only to create financial market disturbances, IIF said.

The IIF report was prepared for Asian Development Bank meetings in Japan last weekend.

China and other emerging Asian countries have relied on export-led growth and built up massive foreign exchange reserves as they kept their currencies cheap to compete globally. These reserves have served as a cushion from unpredictable turns in global investor sentiment for countries that were ravaged by the Asian crisis of 1997-98.

By the end of 2006, foreign exchange reserves in the emerging Asia region reached $1.3 trillion, with the bulk held by China. The IIF estimates this will rise in 2007 to $1.7 trillion, with China accounting for two thirds of the increase.

Despite their economic success, the IIF noted that growth has trailed their global peers in the five Asian countries hit hard by the Asian crisis -- Indonesia, South Korea, Malaysia, Philippines and Thailand -- which pursued FX reserve-building along with export-led recoveries.

''It takes more than selling merchandise around the world to compete in the global economy,'' said Fager.

In China, the IIF forecasts further growth in its current account surplus this year to 350 billion dollars or 11 per cent of GDP, up from 250 billion dollars last year. Even though export growth is poised to ease over the near term, import growth is likely to remain limited, making the surplus swell, it said.

The Chinese central bank is likely to tighten monetary policy further but not enough to derail a robust expansion, forecast at 10 per cent this year and next, it said.

The prospect of little progress in reorienting growth toward the domestic economy and diminishing the external imbalance means FX reserves will continue rising, the IIF said. This will add to pressures from the United States, which wants China to relax controls over the yuan to correct its huge trade imbalance.

The IIF forecast China will quicken slightly its yuan appreciation from a 5 per cent rise against the dollar this year to 7 per cent in 2008. But it added: ''This is unlikely to correct the large trade surplus or quell rising protectionist sentiment.'' For the region as a whole, the IIF said that its six-year expansion appears to have peaked, although the region retains considerable momentum. Growth is likely to ease a little to 8.2 per cent in 2007 from 8.6 per cent last year, it said.

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