(Yahoo, Nov 28, 2006) China needs to let the yuan rise faster to counter the risk of overheating from double-digit growth and to temper an ever-swelling current account surplus, the OECD said on Tuesday.

In its semi-annual Economic Outlook, the OECD forecast Chinese gross domestic product growth would slow mildly in 2007 to 10.3 percent, from 10.6 percent this year, before reaccelerating to 10.7 percent in 2008 for the sixth straight year of 10 percent-plus growth.

Because of strong investment, China now had the capacity to grow at "somewhat more than 10 percent", the Organisation for Economic Co-operation and Development said.

Accordingly, the Paris-based think-tank of 30 industrial democracies expects consumer inflation to remain tame at around 1 percent in 2007 and 2008.

But it said the excessive liquidity generated by rapid growth in China's foreign reserves posed an inflationary risk. This would be exacerbated if Beijing tried to rebalance the economy by boosting fiscal spending while keeping a lid on the yuan.

"A more rapid appreciation of the exchange rate would not only reduce the risk of overheating, but would help diffuse the protectionist sentiments that have grown abroad," the OECD said. ADVERTISEMENT
 
 

Although imports are likely to grow faster than exports in 2007 and 2008 as China's price competitiveness deteriorates somewhat, the current account surplus is set to grow to $284 billion, or 8.8 percent of GDP, by 2008 from $161 billion, or 7.2 percent of GDP, last year.

Some relaxation of fiscal policy -- if accompanied by a firmer yuan -- would be in order to reduce the surplus by inducing a shift to domestic demand, the OECD said.

It said China, the world's fourth-largest economy, can certainly afford to spend more.

The general government fiscal balance was likely to be in surplus to the tune of 1.5 percent of GDP this year, partly due to buoyant corporate tax revenues stemming from "extraordinarily strong" profits, the report said.

The Economic Outlook also reviewed the prospects for the following Asia-Pacific countries: (China and India are not OECD members.)

AUSTRALIA

Drought will hold back agricultural exports and limit GDP growth next year to 3.0 percent, but a return to more normal rain patterns should lift the rate in 2008 to 3.4 percent, with the economy operating close to capacity.

Headline inflation might not fall back into the central bank's 2-3 percent target range until mid-2007 because of the lingering impact of high energy and fruit prices. But the OECD then expects inflation to settle around the midpoint of the range, even assuming modest interest rate cuts from late 2007.

Commodity prices, which have driven Australia's terms of trade to a 32-year high and boosted incomes, are probably close to a peak, but the timing of the eventual downturn is uncertain.

NEW ZEALAND

Inflation should fall back into the central bank's target range in coming quarters, ushering in a cut in interest rates early in 2007 that would be the start of a "significant" easing in monetary policy.

The OECD has cut its 2007 GDP growth forecast to 1.3 percent from 1.9 percent as a strong exchange rate hampers the shift to export-led growth required by a huge current account deficit.

Investor skittishness over the deficit is among the considerable risks to the OECD's forecasts. It signals that any further fiscal stimulus may delay monetary easing and says it is unclear how households will respond when home prices stabilise.

SOUTH KOREA

The OECD has cut its 2007 GDP forecast to 4.4 percent from the 5.3 percent it projected in May as weakening exports -- due to softer global demand and earlier won strength -- undercut a firming in domestic demand. Slower exports will balance the current account in 2007 after 9 straight years of surplus.

Political tensions over North Korea's nuclear ambitions could sap consumer and business confidence and thus slow domestic demand, while a sharp rise in borrowing costs could hobble household spending by more than expected.

On the upside, a focus on IT and communications goods, plus close trading links with a buoyant China, could lead to a stronger-than-projected rise in exports, the OECD says.

INDIA

The economy has considerable momentum but GDP growth is likely to slow to 7.5 percent in 2007/2008, from 8.0 percent this fiscal year, as inflation erodes real income and consumption and the central bank raises interest rates further early in 2007.

The OECD says one risk is that an expansionary fiscal policy boosts CPI inflation above 5 percent.

Conversely, it says it is possible that the underlying growth path of the economy has increased due to stronger exports of software and business services, despite poor infrastructure.

For a table of Asia-Pacific forecasts, please double-click on [ID:nPEK141755]

Source:Yahoo