World turmoil won't affect China much

BEIJING - The world economy will not experience a double-dip recession and emerging countries, including China, will not be much affected by turmoil in Western markets, a senior economist said on Saturday.

"Currently, there is no double-dip trend. It's just a less optimistic situation," said Fan Gang, a former adviser to the central bank's monetary policy committee. Fan said the slump in major stock markets was a correction of earlier overheating that would have a limited influence on other economies.

He made the remarks during the fifth Annual China Bankers Forum 2011 in Beijing.

Investor confidence in a global economic recovery took a hit after international rating agency Standard & Poor's downgraded the US long-term credit rating from AAA to AA+.

Meanwhile, China's stocks fell nearly 1 percent on Aug 19 after Wall Street slumped more than 3 percent amid rising concerns about a global double-dip recession.

"There is no need to panic. Since the depths of the financial crisis in 2008, emerging markets have become much more independent of developed economies," Fan said.

"The main growth momentum of China's economy will not be affected."

Fan said the total scale of sovereign debt at risk of default in Europe and the United States lags far behind the level in 2008, but he suggested China should further tighten its monetary stance by issuing central bank bills to counter increasing capital inflows in the months ahead.

"There is still space for the government to further tighten," Fan said.

After the US lifted its debt ceiling, many speculated that another round of quantitative easing is around the corner, which could mean excess liquidity in emerging countries.

Concerns over accelerated capital inflows, especially of hot money, and the increasing pressure these inflows exert on China's government to curb inflation, have deepened since the country's foreign exchange reserves rose by a faster-than-expected 30.3 percent year-on-year as of the end of June to $3.2 trillion.

The consumer price index, a key gauge of inflation, rose 6.5 percent year-on-year in July to a three-year record.

To fight inflation, the central bank has raised interest rates three times and increased the required reserve ratio for commercial lenders six times this year.

China may still face "relatively large" pressure from capital inflows in the second half, the State Administration of Foreign Exchange said earlier this month.

Ronald McKinnon, a professor of economics at Stanford University, said the near-zero short-term interest rate in the US has driven hot money to emerging markets including China, and these countries should take measures to avoid the rapid appreciation of their currencies.

China's yuan strengthened beyond 6.4 per dollar for the first time in 17 years on Aug 11, after the US Federal Reserve Board said it would keep interest rates at a record low.

Cao Yuanzheng, chief economist of Bank of China Ltd, forecast the yuan's exchange rate would appreciate 5 to 6 percent for the full year.