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China paper warns currency war could fuel bubbles

The world faces risks of a currency war that could boost inflation and asset prices in emerging markets, an official Chinese newspaper said today.

business Updated: Oct 12, 2010 09:38 IST

The world faces risks of a currency war that could boost inflation and asset prices in emerging markets, an official Chinese newspaper said on Tuesday.

The China Securities Journal said in a front-page editorial that Beijing would have to control the pace of yuan appreciation and refrain from raising interest rates in order to ward off inflows of speculative capital.

It said that many countries were trying to weaken their currencies, but that those efforts would ultimately be in vain and could eventually provoke a trade conflict.

"The financial crisis could escalate into a currency crisis," the newspaper said. "There will be no winner."

Efforts by the United States and Japan to weaken their currencies would lead to higher global commodity prices and fuel money flows into emerging markets, pushing up inflation as well as stock and property prices, it said.

Against this backdrop, there will be considerable pressure on the yuan to rise, the paper said.

The central bank will find it difficult to raise interest rates because an increase in the Chinese yield spread over the United States Treasuries would only suck in more cash, it added.

"A fundamental solution is to reform the current global currency system and call for a diversification in international reserve currencies," the newspaper concluded, without going into detail.

The IMF's member countries sought to defuse currency tensions during the weekend by calling for urgent action to bolster the Fund's role in scrutinizing those macroeconomic policies that could pose a threat to global stability. But they laid out no concrete plans.