January 29, 2006	Sunday	Zilhaj 28, 1426

DAVOS, Jan 28: Massive flows of capital from the emerging to the developed world are unsustainable and risk damaging both poor and rich countries, some of the world’s top finance officials said on Saturday.

Speaking at the World Economic Forum in Davos, European Central Bank President Jean-Claude Trichet said that the current global investment pattern was “profoundly abnormal” and in no country’s interest.

It is not sustainable in the long run that the emerging world would finance the industrial world. It doesn’t correspond to the interest of the emerging world, neither to the interest of the industrialised world, he said.

In a similar vein, Indian Finance Minister Palaniappan Chidambaram said countries like his, one of the emerging stars on the global economic scene, were under threat.

Global imbalances are deepening and that has serious consequences for developing countries like India, he said.

The United States is currently seeing huge inflows of capital from the developing world, notably China, that are financing its current account deficit, bolstering the dollar and keeping long-term interest rates low though bond purchases.

The danger to the world economy is that when the inflows eventually dry up there could be sharp economic and market dislocations.

There are potential triggers that could create serious consequences for the global economy. The first is a southward movement of the dollar, the second is an unexpected increase in US interest rates ... Thirdly, (a spiral in) energy prices... will lead to inflationary expectations, Chidambaram said.

US Deputy Treasury Secretary Robert Kimmitt said that his country needed to play its part to solve the im balances but also called on China again to let the yuan currency strengthen.

The US needs to increase savings, starting with a reduction of the budget deficit, he said. China needs to move its currency to be driven by underlying market forces soon.The growing significance on the world economic stage of countries such as China and India has been a major theme this week at Davos.

US officials such as Kimmitt have been keen to say that they are not expecting any immediate change in the flow of funds from China in particular and that US financial markets are robust enough to handle a change.

There are some concerns on the bond market, however, that China is losing some of its appetite for Treasuries.

India’s Chidambaram, meanwhile, said that he expected flows from China would change as local consumption grew.

I think the direction of exports will change. A country like China will be forced to stimulate domestic demand ... I’m not judgmental about China. The people of developing countries have to have a higher consumption of goods and services, he said.—Reuters