China should boost interest rates or allow its currency to strengthen to help curb inflation pressures, the Asian Development Bank said Tuesday.
China, like most Asian countries, boosted government spending and slashed lending rates last year to help spur economic growth amid a global recession. The region's policymakers are now mulling how much to ease stimulus spending and raise rates to keep their economies from overheating.
"Over the next 12 to 18 months, interest rates may need to rise significantly depending on how exchange rate policy is handled," the development lender said in a semiannual policy report on emerging East Asia released in Singapore.
The Manila-based ADB defines emerging East Asia as Southeast Asia plus China, Hong Kong, Taiwan and South Korea.
The ADB said Beijing's pledge last month of a more flexible exchange rate policy suggests the yuan may appreciate, which would help temper inflation pressures.
Chinese Premier Wen Jiabao last week said his country is trying to balance strong economic growth with keeping inflation under control. The government targets gross domestic product growth of 8 percent this year with an inflation rate of 3 percent, while the central bank earlier this month promised a "moderately easy" monetary policy for the rest of the year.
China, the world's third-largest economy, should speed up the process of returning economic policies to more normal settings to "avoid excess inflation or a hard landing," the ADB said.
It is forecasting 9.6 percent GDP growth in China this year.
South Korea, Malaysia, Singapore, Taiwan, and Thailand should continue to raise interest rates while Hong Kong, Indonesia, the Philippines and Vietnam may soon need to cut spending and tighten monetary policy, the ADB said.
The ADB expects the 14 economies of emerging East Asia to grow 8.1 percent this year — up from a previous forecast of 7.7 percent — and expand 7.2 percent next year.
"Each will require some macroeconomic tightening as the recovery continues," the report said. "Strong growth momentum suggest these economies can continue to gradually unwind stimulus."
The ADB warned that a slowdown in developed economies in the second half could undermine growth in Asia and justify maintaining spending programs and low interest rates. The ADB expects the U.S. to grow 3.0 percent this year and Europe to expand 0.8 percent.
"Should Europe's problems create strong headwinds to global recovery, authorities may decide to keep stimulus in place a while longer," the report said. "Still, the longer macroeconomic stimulus is maintained, the greater the potential threats to medium-term economic and financial stability."
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