This is a verbatim transcript of the Chief Economist's press conference

Moderator: Ann Quon, Principal Director, Department of External Relations, ADB:

Hello and good morning. My name is Ann Quon, principal director for the Department of External Relations of ADB. I know many of you are already familiar with ADB, but for those of you who aren't, we are a multilateral development bank. We are based in Manila, and so we're very pleased to have our global launch of the ADO at the FCC, here in Hong Kong. It's always nice for us to be in Hong Kong. Those of you who follow the Asian Development Outlook will know that it is our flagship annual economic report that analyzes trends and forecasts in the Asia-Pacific region. We look at how the region performed in 2009 and as all of us well know we had a very difficult year last year with the global economic crisis. So we're going to be looking at how economies performed last year, this year, as well as do a little bit of forward looking into 2011.

This is what ADO 2010 Outlook looks like, it's a pretty heavy document and we've actually uploaded it on a CD for you so we save some trees, and at the end of the conference it will also be available on-line for you.

It actually comes in three parts. Part 1 looks at the global economic conditions underlying our assessments and projections for the region, and then Part 3 evaluates on a country-by-country basis the performance of 45 of our member-economies as well as provides some macroeconomic projections. Part 2 is the juicy part from my point of view. That's the one that contains the theme chapter, and this year we really looked at the challenges facing the region's economies as we exit this global economic crisis. And so we're looking at, as you can see there, Macroeconomic Management Beyond the Crisis, prescriptions on what should economies be doing in order to sustain any growth path that we see for them.

I'm sure a lot of you have the same questions that we have in mind when it comes to the global economic crisis, how sustainable is this rebound that we're seeing, what can governments do to ensure that they stay on a sustainable economic recovery path, what are the risks and challenges to this. I'm sure these and other questions you have in mind, and I hope that we have some of the answers for you. So on this note I would like to introduce our Chief Economist for ADB, Dr. Jong-Wha Lee, who will present to you the key findings of ADO. So let me hand over to Dr. Lee.

Presentation of Dr. Jong-Wha Lee, Chief Economist, ADB:

Good morning. Thank you for attending this press conference for the Asian Development Outlook. My presentation today will focus on the economic prospects for developing Asia and I will then discuss the issues related to the macroeconomic policy challenges, which is the special theme of this Asian Development Outlook. After my presentation I will be happy to take any questions that you may have.

Let me summarize the key messages of my presentation. Developing Asia's recovery has taken firm hold with growth projected at 7.5% this year, accelerating from the 5.2% last year. Inflation pressures are now increasing, but are likely to be manageable in most of the region.

But there are risks coming from the global uncertainty and the volatile capital flows.

As we know, the region weathered the harsh global environment quite well in 2008 and 2009. But now the question is how to shift from the monetary and fiscal policies support to the robust private sources to sustain growth. Asian governments must take the challenge of adjusting monetary, fiscal and exchange rate policies to prepare their economies for the changing environment in the post-crisis period. We suggest authorities to reaffirm their commitment to prudent macroeconomic policies.

I now begin with global and regional outlook. This table summarizes economic prospect for the global economies. We expect the global economy to see only mild recovery this year. GDP in the U.S., Japan, and Eurozone will expand by 1.7% in 2010 on average and slightly accelerate to 2.0% in 2011. But uncertainty will still cloud the global outlook. As emergency policy measures are gradually being unwound, the strength of a broader demand component especially from the private sector is not robust enough to take over from these temporary sources. For the United States the projections are for moderately paced recovery with the GDP expanding by 2.4% in 2010 and 2.6% in 2011. For Japan the outlook remains sluggish, growth projections are 1.3% in 2010 and 1.4% in 2011. For the Eurozone, GDP is forecast to expand by a weak rate of 1.1% in 2010 and 1.6% in 2011.

A mild recovery in the world trade volume is projected for 2010 and 2011 ranging between 7% and 8%. Inflation in the G3 economies is expected to be subdued at a low 1.5%.

As I said we expect a weak recovery in the industrial economies. In contrast, we are optimistic that developing Asia's economy will be robust, supported by improving global prospects and sustained impact from the fiscal stimulus and monetary stimulus. We project developing Asia's growth to rebound to 7.5% in 2010, a strong acceleration from 5.2% in 2009. Though still we are below the record 9.6% growth of 2007, the region faces the challenge nonetheless of maintaining momentum against the backdrop of a gradual unwinding of expansionary measures and the slow pickup in external demand. The projection for 2011 is a moderate 7.3%.

This plot shows the sources of the growth in 2009 in eight economies in Asia. The varied GDP growth performances across the economies highlight the importance of resilient domestic demand, both consumption and investment when hit by large external shocks coming from the global economy. You can see this yellow part of this chart is the investment, how much the investment contributed to overall GDP growth in 2009. As you can see it fell sharply in many countries ... Singapore, Malaysia, Thailand, and Korea. This is the main factor pulling economic activity so low in 2009. The impact was particularly severe for the more open economies, as Singapore and Korea. This was basically driven by the collapse in exports, when export-oriented industries cut investment.

But if you look at the other countries, the three largest countries in Asia - People's Republic of China and India and another large country is Indonesia showed investment resilience. This yellow part is contributing positively to the GDP growth, especially when you look at China. So of course this is stimulated by the largest fiscal stimulus packages that sustained business sentiment and that supported their corporate sectors.

This contribution of consumption is shown in the green part, so many countries, especially the large economies including the PRC and India and Indonesia that are notably resilient, and also the Philippines, is also buoyed by the resilience in the remittances from overseas workers. I mentioned that government fiscal stimulus contributed significantly to supporting the GDP growth in 2009. Governments across the region boosted spending and cut taxes to support demand and growth. They responded decisively with a sizeable fiscal stimulus packages. As we can see as a result fiscal balances deteriorated sharply across the economies. The effect of this spending actually will still be felt this year.

Across the subregions, as we can see in this chart Southeast Asia's growth is forecast to see a sharp improvement from the 1.2% growth in 2009, this was the weakest outcome since the Asian financial crisis of 1997 and 1998. Aggregate growth is forecast to rebound to 5.1% in 2010. The five economies that shrank in 2009 will return to positive growth in 2010.

The best performer in 2010 will be the East Asian subregion where GDP is expected to accelerate to 8.3% in 2010. This will be supported by the resilient growth in China and strong recoveries in other economies including Hong Kong, China, Mongolia, and Taipei,China.

For South Asia, because major countries report figures in fiscal year terms, actually the growth in 2009 inched up to 6.5% from 6.4% in 2008, measure negative impact to happen to the first quarter of 2009 that is counted as another fiscal year. Growth is expected to pick up in most South Asian countries in 2010.

Central Asia also suffered last year, as growth slowed to 2.7% from 6.1% in 2008. All countries bring a weaker performance. Recovery is slow but the region's growth will become faster on the rebound in the Russian Federation and higher oil prices.

Growth in the Pacific region pulled back to 2.3% in aggregate terms in 2009 but this subregion is also expected to see recovery this year.

This chart shows the individual economies or selected economies. Let me just pick up PRC, which is forecast to expand by 9.6% in 2010, up by close to one percentage point from 2009. Aggressive fiscal and monetary stimulus is being adjusted but we'll continue contributing to the strong growth. Buoyant domestic demand will be backed by external demand this year. The trade surplus will resume its upward trend. Economic growth is forecast to ease to about 9.1% in 2011 as the stimulus policies are phased out.

India will lead South Asia and is projected to grow 8.2% this year. Its rebound from a year earlier and continued strong expansion stem largely from domestic demand conditions.

Let me get to the inflation pressures. As economic activities recover inflation will increase but will remain manageable. This plot shows the region's inflation returning to the historical average of around 4% in the coming two years. Although consumer price inflation pressure I expect to be manageable sharp increases in asset prices need to be monitored. I will come back to this issue.

Unusually easy monetary policies throughout the region cannot be kept for too long and there is a need to revert to a normal stance.

In general, inflation pressures would be manageable in the region.

The current account surplus narrowed down in 2009, is now on average is 4.9% of the total GDP in the region. It severely declined from the record peak of 6.5% in 2007. It will narrow further in 2010 and 2011.

Let me just pick up some East Asian countries here. It shows GDP growth and inflation. As I said PRC's GDP growth will remain buoyant, and then the Republic of Korea is expected to rebound to 5.2% expansion to be driven by strong private investment and consumption and a pickup in global trade.

Of course this environment will also help other more open economies in the region including Hong Kong, China. For Hong Kong, gradual recovery just started in the second quarter of 2009 will be accelerated supported by the strong export to mainland China but also the aggressive stimulus programs implemented in Hong Kong, China. This growth momentum we forecast will continue, GDP growth will be 5.2% in 2010. But it will slow down to 4.3% in 2011 with the phasing out of this exceptional government stimulus policies, not just in Hong Kong, China but also mainland China.

Let me just go to some risks to the outlook. I'll just skip some slides for the other subregions. As I said now that we forecast recovery has taken a firm hold but there are several downside risks ... not just several actually, you can see we listed eight risks. First of all, weakness in the U.S. mortgage market continues to be a concern. So the U.S. recovery is still weak at this point. Also the macroeconomic policies ... withdrawing the monetary and fiscal stimulus in the industrial countries may be mistimed, then that would derail the recovery in the region. As the Dubai and Greek crises highlight, rapidly deteriorating fiscal positions in the industrial countries will have dire consequences for global financial stability. And a jump in commodity prices will decelerate growth impetus as the experience of the 2008 price spike demonstrate that rising food prices could lead commodity producers to hold export in the name of food security which would only exacerbate the problems.

In the mid-term the risk is still with global imbalance. I will come back to this issue, but this may pose risk of the next crisis. Coordinated policies are important for regulations to be effective particularly among the G20 group of countries so as to avoid regulatory arbitrage. Multilateral cooperation is the key to protect global stability. And this is very crucial to avoid bilateral conflict over exchange rate and trade issues, so multilateral cooperation is more important than bilateral negotiations.

In addition, the region's stronger recovery and higher interest rates relative to those in the major industrial countries are already attracting potentially volatile capital flows which may trigger asset price bubbles and complicate macroeconomic policy management. I will get back to a couple of issues here. This is the chart for the U.S. mortgage markets. This chart shows the delinquency rate of the residential mortgages as well as on the commercial real estate. These remain elevated in the United States, so bank balance sheets are suffering as a consequence so they may not be the slow recovery in the new loans in this real estate market in the United States.

I mentioned this global current account imbalances ... this chart shows that the so-called global current account imbalances, the lower part of the chart shows that the current account deficit by country as a percent of the world GDP. The upper part shows that the current account surplus as a ratio to the world GDP, you can see actually the deficit decreased significantly during the crisis time mainly due to the cut in the U.S. current account deficit. But you can see the surplus side, it's declined, but it has been again increasing.

Of course at this crisis the current account surplus and deficit decreased significantly, but adjusting the current account imbalance requires more structural adjustment especially in saving and investment. So the question is whether this decreasing current account imbalances in the global scene will be sustainable or not. This is the big challenge for the Asian countries because disruptive unwinding over the global imbalance will create very volatile capital flows and will hurt the Asian countries.

Let me get to this issue of asset prices. As I said there is now expectation for the robust economic recoveries. Do asset prices reflect the future growth fundamentals? Of course there are some speculative investments in the real estate prices everywhere. But now we can see this big surge in the PRC and Hong Kong real estate markets. Hong Kong's house prices now went back to the pre-crisis levels. China is showing an increase in trend over time, this is the national average. But recently there is a big surge. For some regions, prices increased more significantly, about over 30% over the year. Now the central banks in the region need to closely watch the developments in the macroeconomic indicators and implement regulatory measures as soon as the signs of the bubble emerge. This is another challenge to the central banks in the region.

I mentioned that this volatile capital flows ... this is another big challenge to the Asian countries. Now countries faced with big surge in capital inflows, you can see this chart shows net inflows in the second half of 2009 and now many countries, especially now that their recoveries are firm they may raise interest earlier than industrial counties, but then you will attract more capital flows. You would rather have more long-term stable capital flows, but volatile short-term capital inflows may be disruptive to economic activities. So there must be some policy measures. Of course strengthening the regulatory measures could be one, and then greater exchange rate flexibility also will help to mitigate the negative impact coming from the huge capital inflows because too much intervention in the foreign exchange market will lead to the excessive liquidity in the domestic financial markets but also it will create exchange rate misalignment. Of course there is room for applying for the macro-prudential policies to deter the formation of asset and price bubbles for financial institutions.

Our report also discussed in length about options that developing countries could adopt, especially to directly control capital inflows, which are called capital control measures to deter these short-term disruptive inflows must be considered by the governments in the region.

There is no doubt that macroeconomic policies especially decisive fiscal and monetary response to the crisis help the region recover from the global crisis. But now that we are going into the post-crisis changing environment, now we are facing a wider range of the new macroeconomic challenges. As I mentioned, volatile capital flows, structural challenges such as re-financing. So now is the time to ask the questions - what role fiscal and monetary policies can play in coping with those challenges. This is what we discussed in the special chapter in the ADO. The title is Macroeconomic Management Beyond the Crisis. Let me briefly summarize the main messages in this chapter. The governments across developing Asia quickly rolled out fiscal and monetary stimulus packages during the crisis to fight the sharp downturn in economic activities. But now as the global crisis recedes and the normalcy returns, we consider that developing Asia should reaffirm its commitment to the sound and responsible fiscal and monetary policies that fostered macroeconomic stability and sustained growth. There is plenty of scope to improve and strengthen monetary exchange rate and fiscal policies to better prepare for the post-crisis world.

So let me just summarize the main messages. First we think there should be close coordination between monetary policy and financial regulations. This will allow Asia to better monitor and prevent asset price bubbles while maintaining the primary focus on inflation.

Second, exchange rate policy must shift away from excessive focus on export competitiveness. More flexible exchange rate driven by fundamentals provide the mechanism to absorb shocks resulting in a more efficient allocation of resources and promote the region's rebalancing process.

Third, the region should continue its tradition of sound fiscal policy in the post-crisis period to secure adequate fiscal space for the future shocks. Jointly pursuing fiscal and exchange rate policy reforms will magnify their impact on rebalancing. The big challenge for Asian countries is to strengthen the domestic source of growth. How to strengthen domestic sources of growth? It will require some structural measures, but also macroeconomic policies could help because fiscal measures such as the public spending on health care and pension can mitigate household uncertainty and boost consumption. Greater exchange rate flexibility usually accompanying the strong currency will boost household purchasing power and allocate resources to the domestic industries.

Finally, policy coordination is extremely important. Cooperation in exchange rate policy among Asian countries will mitigate their fears of losing export competitiveness. Some countries, because Asian countries also compete in their export to the major markets, so they cannot really initiate a big appreciation of their currencies because they are afraid of losing competitiveness. More concerted appreciation of the regional currencies actually will help them to reduce their fear of losing export competitiveness.

There are other issues that require global cooperation like how to strengthen the global financial establishments by reforming global financial architecture and how to strengthen global financial regulations. These issues are better addressed in multilateral venues and Asia should play an important role in making the contributions in the global discussion.

Thank you very much, this is the end of my presentation. I will be happy to answer your questions now.

Q & A

Q1: I have two questions about China because recently everybody was talking about the currency reform of China. What will you suggest China should do? There are some news, some information from mainland media that China may do the same thing as what they did in 2005, which was a one-off appreciation of the renminbi? So I'd like to have your opinion in what magnitude will the renminbi appreciate and this year and will it affect the economy and export of China?

A1: I think that the greater flexibility of the Chinese yuan is in the PRC's interest and in the global economy's interest. The key issue is how to align the value of the exchange rate to its own fundamentals. This is a very important issue. Actually the magnitude of the Chinese yuan's revaluation is there are wide estimates so we cannot really pick up what is the valuation of the Chinese currency. But no doubt a stronger yuan will help reduce the global imbalances because it will help reduce China's current account surplus. But also it will help reallocate Chinese resources to the domestic industries and boost the purchasing power of households. So we support PRC's effort of the movement to reduce exchange rate rigidity over time.

Q2: Do you think right now the yuan is under-priced? Will we see any chance the yuan to appreciate in the near term? If yes, what is the implication on the regional economy as a whole? And second question, do you see any chance of a double-dip in the US economy in the middle of the year as some analysts suggest because of the exit strategies? If yes what is the implication on the regional economy as well?

A2: As I said the Chinese yuan's flexibility will also help the region's economy because in my presentation I said the concerted appreciation of the region's currency will help reduce some countries' fear of losing export competitiveness because as you can see since the third quarter of 2009 the region's currencies started appreciating. As I explained now we see that because of these great growth potentials in the region and stronger recovery and also the increase in the interest rates will attract more capital flows that also puts more pressure on the exchange rate. But if the major countries in the region just keep the exchange rate unchanged, other countries will be afraid of losing their export competitiveness. So if you think in the global economic recovery requires stronger global demand - we understand the U.S. consumption will still be very sluggish in terms of the recovery - so we need a stronger global demand which may also come from this region because this region is showing strong recovery and then we also now constitute significant part of the global demand. So how to strengthen the national and regional demand in the region will require stronger currencies because that is basically the argument why we support the increase in the currency value of the Chinese yuan by increasing the exchange rate flexibility you have not only China but also the region.

We support the Chinese yuan's increased flexibility and then reflect more fundamentals. Currencies should reflect more fundamentals. I think increasing the flexibility will eventually move the currency value in line with its fundamentals.

Your second question on the possibility of a double dip in the industrial countries, our baseline scenario is that the global economy, as I said, industrialized countries will show a milder recovery in 2010 and 2011 because these stimulus programs still remain effective this year and also we see that even though its weak consumer confidence is reviving and the restocking of the inventory investment was very active, but also the business confidence is slowly reviving. But that's basically our baseline scenario. As I mentioned there are significant downside risks too, which may come from the mistimed policy adjustments as well as still lingering problems in the U.S. housing market. But our baseline scenario is to rule out these double-dip scenarios. We only see a very mild recovery in the global economy.

Q3: You mentioned more flexible exchange rate would help to reflect fundamentals of the region's economy but as we know speculators or investors, they're all looking at chances of high returns so a more flexible exchange might undoubtedly invite more capital inflows into the region. So how would you expect asset price bubble problem in PRC and Hong Kong as a whole? Would you expect the prices of housing and capital market might increase even more if you adopt a more flexible exchange rate regime?

A3: Strong capital inflows, especially short-term disruptive capital inflows and outflows will hurt the domestic economies especially the financial institutions. Actually the exchange rate flexibility will help mitigate the negative impact coming from this volatile short-term capital flows because the exchange rate is fluctuating, and then actually that helps reduce the impact of capital inflows on the money supply. So if the countries are heavily intervening in the foreign exchange markets to keep the exchange rate fixed...actually the way they are intervening here in the foreign exchange market will eventually keep the pressure on the domestic liquidity. There are two ways (of foreign exchange market intervention- sterilized and unsterilized) ...of course China is doing the sterilization but it cannot continue the sterilization that means it cannot continuously observe the money supply. So basically what I am saying is this is the time to improve the exchange rate flexibility. They will reduce this negative impact coming from the volatile capital flows. And then second if you go through the appreciation, it will reduce the inflation pressures because the strong currency will reduce the import price. That's why we think this may be the right time to increase exchange rate flexibility.

If the exchange rate becomes very volatile it may hurt the export sector, that's another issue. That's why we said increasing exchange rate flexibility is one measure, but there are other measures ... increasing the regulatory measures especially to strengthen financial institutions, and also reduce the extreme volatility of the exchange rate by considering some direct, administrative capital control measures.

As I said there is an increasing risk of asset bubbles in the PRC as well as in Hong Kong, China. The recent trend is showing that this price, especially of the real estate price, especially in some urban areas or coastal areas, increasing significantly. The question is whether this increase in asset price will spread to the other regions in the country. If this really spreads in all the countries and then increasing the speculative demand for real estate that will be very risky. The question is how to prevent this formation of asset price bubbles. It will be the big challenge for central banks and financial regulators in the region.

I understand the Hong Kong government, as well as the PRC government, are already trying to implement the policies to fend off this increasing pressure on the asset prices.

Q4: You said right at the beginning, quote: "Inflation pressure is now increasing but likely to be manageable in most of the region." Is there any region where you think it's going to be particularly hard to manage or not manageable particularly on the consumer price side. Specifically in the case of China you talked mostly about asset price bubbles, but do you see a risk of greater inflation that consumer level given the drought, given rising commodity input prices for their imports?

A4: The consumer price inflation side of course it may come from the excessive demand in the domestic markets, also may be stimulated by excessive liquidity coming from the monetary policy side. So the question is how to exit from this monetary stimulus. Another question is also the capital flows ... capital flows will create the increasing pressure on the consumer price, also coming from the high commodity prices. They can be combined together. There is no doubt that some economies will eventually get to the very high pressure of the inflation. One country particularly mentioned in the report is Viet Nam. Our forecast for Viet Nam's inflation in 2010 is 10% and will remain very elevated. So the question is how to address this high inflation. It will be the challenge for the Vietnamese government.

We know the Viet Nam government already started even last year by raising policy rates to reduce the liquidity in the financial markets. But I think the pressure is still big.

Q5: The crisis in Greece has shown the quality of people like you work with or we as journalists work with are not good. You think somewhere in developing Asia we also have economists that provide us with data that are not what they really are? If yes, which one?

A5: The question is basically on the unexpected shock especially coming from the quality of the data like Greek public debt. Sometimes people are not fully aware of the risk and all of a sudden markets are discovering the risks. Whether Asia has any unknown risks when we show the old data, we also raised that issue, especially there in counsel with the coordination among the policymakers. Especially now we raise the issue of how to monitor financial markets, financial institutions. Gathering information and sharing information among the appropriate policymakers is key. It's not only within the country but also across the countries, especially if the risk in one country spreads to other countries. These are coordination issues, but also fundamental, how to develop appropriate information gathering mechanisms is important. We also as a multilateral development institution, we should also strengthen the statistical capacity in the national government. This is a key challenge. Regarding the fiscal debt issue, official debt issues, as you can see, I don't have a slide here, but fiscal debt is quite low compared to the size of the European debt. So basically the fiscal debt at its level is not really the big challenge, but as I said if developing Asia continues its loose fiscal policy, eventually the fiscal debt size as a ratio to GDP will increase significantly in the mid-term. We are saying now may be the time to address these issues and then depending on the country, but going back to the more prudent fiscal policy implementation is important.

The reason I raised this issue ... fiscal debt, we don't know the off-balance fiscal items. Some countries may have some hidden debt in the other sectors. That's another issue. We need to strengthen monitoring and surveillance in the region.

Q6: Some concern has been raised the way PRC has financed its economic enhancement program, that local and provincial governments created special investment vehicles which actually out of budget balance but nevertheless public debt in the end because they are coming to state-owned banks. Is that one of the issues you have mentioned just now?

A6: The question is we don't have the exact data so we cannot really get into details. But your point is correct. Basically during this crisis time government mobilized big stimulus packages. Also they put the increased liquidity in the banking system and then the banks, especially with local and state governments, they implemented to support state-owned enterprises. So the question is whether these increasing resources were effectively allocated within the country. And then whether it will continue to be effective. The question is, sometimes it may have gone to inefficient enterprises, inefficient sectors, eventually coming into the increase in the non-performing loans which will be held by the financial institutions. This is also going to the issue of the asset bubble bust because increasing asset bubbles may also create risk which will come into the debt of financial institutions. So I think eventually, how to allocate fiscal resources more effectively is the challenge to PRC during this crisis time, but more importantly not just the resources implemented by government but it's the private-owned demand, the private-owned resources will be relied on for the long-term development, that will be the important issue for PRC.

Q7: You said inflationary pressure is building up in the region. I want to ask your view on China. Does China see pressure on that and is that manageable for China. Your inflation forecast for China is 3.6%, which is higher than the government expectation. The other question is in your report you said if the country is susceptible to overheating government should further tighten monetary policy. Do you see that as the case for China? Do you see China's economy will see risk of overheating? What should China do?

A7: In general, as long as the recovery is strong and inflation pressure is increasing tightening monetary policy should be implemented. But the question is timing, what would be the magnitude. These are the issues. They may start from withdrawing the bank liquidity by increasing the reserve requirement and then the policy rate will be tightened and increased later. This is the kind of sequencing issues. The question is some countries need to be cautious because too hasty tightening may derail the recovery. But clearly in China's case, an accommodative stance cannot be kept for too long. Now we see some surge in the consumer price and asset price inflation. The question is how PRC could address these issues. Our forecast of 3.6% inflation is not really very high for the PRC's historical inflation because we still see commodity prices may not significantly increase this year. Oil price will remain stable over the year, still there is enough reserve. And then the reason we thought inflation could be manageable is the government is aware of this increasing pressure coming from the increasing inflation pressure. Now they have started actually to withdraw this expansionary liquidity measures. So now we're still going through the more tightening of the monetary policy. So that's why we thought the inflation pressures may not accelerate too much this year and next year.

I explained that this asset price is basically in some areas, especially in the coastal cities, and now we see a significant increase in real estate price. We may not call this overheating but there are increasing risks in the asset bubbles.

Q8: I would just like to ask your view on Thailand given recent developments. You have a growth forecast of 4% for the country. In the light of domestic unrest do you foresee the need to revise this forecast going forward? Do you see any other negatives for the economy? Might the central bank delay raising interest rates, may be even withdraw stimulus measures?

A8: The situation is very fluid. Of course we are not a political institution, so we are not really trying to look at the political event. But obviously this political event will have an impact on the economic situation. So we are also carefully monitoring this economic development. It may have an impact also on policy implementations over the year. So we'll see the impact over the year but we are closely monitoring the situation.

We just made the forecast. This was finalized early last week. It may be too early to say when we will revise the forecast.

Q9: As you mentioned it is the time to allow the exchange rate and to be more flexible. So do you mean China should let the renminbi appreciate now and how much do you predict? My second question is when do you thnk China should increase interest rate?

A9: For the exchange rate, as I said, greater exchange rate flexibility is in everyone's interest. Of course it should be done, as I explained, more in a regional way and multilaterally coordinated way. The exchange rate alone cannot solve all the problems. It will facilitate structural adjustments, though, I see it that way. The exchange rate itself is a kind of variable, which will be determined as an outcome of the domestic and external environment. So currently what we see is China's exchange rate is not really reflecting the fundamentals. Better to move the value in line with its own fundamentals. It will help the Chinese economy. The timing will be determined by the national government. The exchange rate policy is a part of the macroeconomic policy framework as well as the other economic policies. So this will be determined by the national government. We hope that this policy step will increase the magnitude of the flexibility. Now it's rigid, it's pegged to the U.S. dollar. So now, they'll increase the band of the flexibility, (so that) the move will be driven by fundamentals. Then we'll come to certain fundamental values, so how much (of the adjustment) will be basically be driven by the market. We are not really supporting everything should be done drastically in one step because we also understand that China's growth is dependent on this strong export. So a dramatic, one-step increase in the currency value may hurt their export sector. In terms of monetary policy tightening as I explained if it will come together with other policy instrument, we'll see, whether it will be implemented. Policies should be coordinated within the framework of the macroeconomic policies, like the financial policy regulation should be strengthened and the monitoring capital inflows as well as looking at withdrawal of fiscal stimulus. All these combined together, and then the monetary policy tightening will be implemented.

Q10: The United States and the Eurozone seem to be very cautious to hike the interest rates, while the developing Asian countries is going for the exit of stimulated package. So I think it's quite natural to see the capital flow of the United States to the Asian countries. Could I have your overview and can I think it's a good flow or bad flow for the developing Asian countries?

A10: Maybe I should say this is too much of a good thing. The capital flow, the inflows, is a good thing in general, but if it becomes too excessive it will disrupt economic activities. And also everyone realizes that since the experience of the 1997-1998 Asian financial crisis, the duration as well as the currency denomination of capital flows is very important. If every capital is coming as a short-term flow and also everything is denominated in foreign currency basically it will create a lot of problems especially for the small economies in the region because you can always create foreign currency liquidity problems if there is a sudden withdrawal of the capital inflows unless you have huge foreign reserves. That's the big challenge of the macroeconomic policies. Your question is whether you would like to accumulate foreign reserves too much, that is also not desirable if you accumulate too much capital. That is the dilemma for the region. We need to strengthen some regulatory measures and then try to prepare how to minimize the negative impact coming from the volatile, short-term capital flows. This will be the big issue this year. That's why we proposed some policy measure to handle these volatile capital flows, these short-term capital flows, like increasing exchange rate flexibility, some sterilized foreign exchange market interventions, and fiscal tightening will help, and also the other measures, and strengthening financial regulations in the domestic financial markets, as well as carefully designing capital controls.

But let me just finally mention that international coordination is very important. This global rebalancing, especially the reduced global account imbalance will also help reduce those volatile capital flows. And also policy coordination among the big industrial countries and developing countries will also help address these issues. For example multilateral institutions like the IMF can play a more important role, strengthening multilateral surveillance, and also like the G20 framework, you can promote more international policy coordinations to help design appropriate mechanism to reduce the magnitude of volatile capital flows and also to set up the appropriate mechanism to reduce the risks coming from the volatile capital flows.

Q11: You mentioned it is about the time to increase the exchange rate flexibility. For renminbi we understand that because the huge trade surplus, capital inflow. But what about Hong Kong? Do you think it's also time for Hong Kong to increase the exchange rate flexibility because we are essentially pegged to the U.S. dollar. And if the renminbi increased flexibility what would be the effect to Hong Kong, and what would you suggest the Hong Kong government to do? Is it because we are having a rigid exchange rate regime and that attracts capital into the country and creates the asset bubble in Hong Kong?

A11: Hong Kong has a very efficient financial market and also the financial sector plays a very important role for Hong Kong. Also the export industry is important. Hong Kong is a very open economy. So the question is whether the fixed exchange rate works better than the flexible exchange rate for its national interest. It can be debatable. But my view in the current situation, the economic literature says the very small economies pegging exchange rate at the fundamental value will help maintain stability in the external transactions, not only in trade but also in finance. So I think in Hong Kong's case the current arrangement is helping maintain the stability Of course the other consequence is you need to carefully monitor the money supply within the domestic economy and how to strengthen the regulation and supervisionary measures are always a challenge. China's situation is PRC is a very big country. China's policies have global consequences, that's why this issue become very highlighted and then sometimes it is just getting into the bilateral conflict over exchange rate and trade policies. But more or less I put it this way, this is important for China's national development and it also has global impact. That's why we think the yuan's excessive rigidity may not really serve PRC's interest as well as the global interest.

Ann Quon, moderator:

Let me just quickly wrap up because we had a lot of very wide-ranging questions, very good discussion, but certainly we see Asia leading the global economic recovery and here it's certainly taken hold. Obviously there are some risks and challenges that we have to face but a return to stronger, sustainable growth is now in sight. And if the region can meet the challenges, strengthening domestic demand, we see growth for 2010 at 7.5%, moderating slightly to 7.3% in 2011. We talked about inflation pressures increasing but still very much manageable in most countries, and of course beyond the crisis, and something that Dr. Lee has talked to you in depth about, is really the challenge as we exit the stimulus measures to really look at monetary, exchange rate and fiscal policies in order to maintain and have a very good macroeconomic stability for the region.