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IMF warns of 'downside risks' in Asia

China buys record amount of Japan bonds in May
Tokyo (AFP) July 8, 2010 - China's investment in Japanese government bonds in May was nearly triple the record annual amount it had invested in the bonds previously, the finance ministry said Thursday. The Ministry of Finance said that Chinese investors had bought a net 735.2 billion yen (8.4 billion dollars) in Japanese government bonds (JGBs) in May, more than the 541 billion yen purchased in the four months previously. The current full-year record was 253.8 billion yen in 2005. Most of the JGBs bought by China are thought to be used by the government to manage its foreign reserves. Most of the investments were in short-term bonds, the ministry said.

The increase coincides with Europe's fiscal crisis and indicates that China is putting more of its ballooning foreign exchange reserves into relatively stable Japan government bonds (JGBs) as a result, say analysts. China has sought to diversify its vast investments away from the US dollar and Europe since the onset of the financial crisis. Japan's risk of default is perceived to be much lower than debt-hit Greece or other eurozone countries, even though its gross public debt is nearing 200 percent of GDP, the highest among developed countries.

With around 95 percent held by domestic investors, Japanese bonds are seen as a relatively safe bet. As of the end of March, foreign investors owned 4.6 percent, or 31 trillion yen, of outstanding JGBs. China's foreign exchange reserves have ballooned in recent years. The reserve, already the world's largest, grew 25.25 percent to a record 2.447 trillion dollars at the end of March from 1.9537 trillion dollars a year earlier, the People's Bank of China said in April. One way Beijing has diversified its investments is through sovereign wealth fund China Investment Corp, which manages around 300 billion dollars and has been investing heavily in resources companies.
by Staff Writers
Hong Kong (AFP) July 8, 2010
Asian economies will expand faster than expected this year but "downside risks" have intensified for the region following financial turmoil in the eurozone area, the IMF warned Thursday.

The Chinese economy should expand by 10.5 percent following a strong rebound in exports and resilient domestic demand, the fund said, revising upwards its April forecast of 10.0 percent.

India's growth this year was revised higher to 9.4 percent from 8.8 percent as robust corporate profits and favorable financing conditions fuel investment.

With the upward revisions for the world's two most populous countries, gross domestic product growth for the whole of Asia in 2010 was revised up to 7.5 percent from 7.0 percent in April.

However for 2011, when stimulus programmes are expected to be withdrawn in several countries, Asia's growth is expected to settle to "a more moderate but also more sustainable rate" of 6.8 percent, the International Monetary Fund said in a report.

It said China's growth could slow to about 9.6 percent in 2011, as further measures are taken to slow credit growth and maintain financial stability.

Olivier Blanchard, IMF economic counsellor, told a press conference in Hong Kong that China was moving in the right direction by encouraging domestic consumption and allowing greater latitude for its currency.

"China's decision to boost internal demand and allow more flexibility for the yuan is very welcome," he said. "Its shift from investment to domestic consumption is very desirable."

Jose Vinals, the IMF's financial counsellor, said China's predicted slowdown in growth in 2011 was mainly due to a general slowing in the macro-economic environment.

The fund expects India's growth to slow to 8.4 percent next year.

In Japan, growth is now expected to reach 2.4 percent in 2010, due mainly to stronger-than-expected exports during the first half, before easing to about 1.8 percent in 2011 as fiscal stimulus gradually tapers off.

The five key Southeast Asian economies of Indonesia, Malaysia, the Philippines, Thailand and Vietnam are likely to grow by an average of 6.4 percent in 2010 and 5.5 percent next year.

Following warnings by the fund earlier this year about the formation of asset bubbles in Asia, such problems in the market had eased, Vinals said.

But the IMF warned that any stalling in the European recovery could affect Asia through both trade and financial channels, even though the region has only limited direct financial linkages to the most vulnerable euro-area economies.

"Many Asian economies (especially the newly industrialized economies and the ASEAN economies) are highly dependent on external demand, and their export exposure to Europe is at least as large as their export exposure to the United States," the report said.

However, in the event of "external demand shocks," large economies such as China, India and Indonesia could provide a cushion to growth, it said.

The report pointed out that significant contagion effects from a Europe-wide credit problem could hit bank funding and corporate financing, especially in those regional economies more dependent on foreign currency financing.

But in the event of such contagion, Asian central banks could swiftly redeploy tested instruments, such as a US dollar liquidity swap facility, to overcome market seizures.

"Many regional economies also have room for further policy manoeuvre and could delay the planned withdrawal of monetary and fiscal stimulus in order to mitigate adverse spill-overs to the real economy," it said.



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Hong Kong (AFP) July 8, 2010
The IMF raised Thursday its global growth forecast for this year despite renewed financial turbulence stemming from a European debt crisis that has sharply raised potential risks. The fund projected the world will grow by 4.6 percent, up from its 4.2 percent forecast in April, reflecting "stronger activity" during the first half of 2010 and expectations of fiscal action, especially in Europe ... read more







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