Rapid flows of capital toward Asia require swift action and cooperation to ensure stability, the head of the International Monetary Fund said Monday, following a conference with central bankers focused on nurturing the global recovery.
"Asia is leading the global recovery and is moving swiftly back toward normal policy conditions," said the IMF's managing director, Dominique Strauss-Kahn. "Capital flows are flooding in. We do not want history to repeat itself in such a short time span," he told financial officials and central bankers gathered in Shanghai.
Strauss-Kahn noted that while the capital flooding into fast-growing China and other Asian countries can spur growth, it could also fuel excessive lending, asset price bubbles and financial instability, according to a text of a speech provided by the IMF.
In some cases, controls on capital may be justified to stem such risks, he said.
But the controls also carry costs, said Yi Gang, a vice governor of the People's Bank of China, the central bank.
Yi reiterated China's resolve to push ahead with cautious reforms of its own currency regime, which critics say is keeping the Chinese yuan artificially undervalued, making the country's exports cheaper in overseas markets and contributing to huge imbalances in trade.
"We will continue the reform of our exchange regime in a gradual manner and at the same time maintain the stability of this economy," Yi told reporters after the conference.
The meeting hosted by China's central bank did not yield any bold new initiatives, merely reaffirming the need to continue working together to reform the global financial system and counter protectionism.
It follows a gathering by top financial ministers in Washington who failed to agree on how to handle rising currency tensions that threaten to overshadow next month's Group of 20 summit in South Korea, but agreed that the 187-nation International Monetary Fund should take charge.
As countries still stricken by hard times seek ways to devalue their currencies to help spur exports and create jobs, the worry is that competitive rounds of devaluations could lead to trade wars.
The United States has helped weaken the dollar both by pressuring Beijing and by flooding markets with U.S. dollars. Japan intervened in currency markets for the first time in years in mid-September, selling yen and buying dollars to push the yen's value lower. Brazil and South Korea have also sought to weaken their currencies.
John Lipsky, a deputy managing director of the IMF, said such concerns were overblown.
"There is no currency war," he said.
The Obama administration, facing November congressional elections where high U.S. unemployment will be an issue, has been pressing China to let the yuan rise more quickly in value against the dollar.
But easing friction with Beijing, it opted last week to delay a scheduled report on whether China is manipulating its currency to gain trade advantages. Instead, the U.S. Treasury Department issued a statement lauding China's decision to let the yuan appreciate by 2.5 percent since June 19.
Before then, China had kept the yuan trading in a narrow range around 6.83 yuan to $1 for nearly two years to help protect its exporters from the global downturn.
On Monday, the central bank set the yuan's reference rate at 6.6541 to the dollar. By late in the day, the yuan was trading at 6.6440, again setting new records against the dollar.