KUALA LUMPUR: Tensions between the world’s economies are escalating as talk of a potential currency war looms large. However, PK Basu, Daiwa Capital Markets’ chief economist for Asia, says these fears are overdone as it is unlikely to pan out.

Basu noted that although Asia has been the fastest growing region in the world in the last decade, all the Asian currency, apart from the Singapore dollar, were still cheaper now against the US dollar than they were in the early 1990s.

“So there is no need for a currency war. It is now Asia’s chance to contribute to global growth by appreciating currencies. Malaysia and Thailand has led the way by appreciating their currency by 10% against the dollar. Over time, China will do the same,” he said at the Oils and Fats Industry Conference here yesterday.

He added that China, which is the last to join the bandwagon, needs to appreciate its currency the most because the country has had a spectacular productivity growth over the last 15 years.

“The renminbi is massively undervalued. And a 20% appreciation in the renminbi will do nothing to hurt China’s competitiveness especially because China competes in most of its exports, not with the rest of the world, but primarily with other Asian producers. So if all the Asian currencies are appreciating together, it is not going to hurt China’s competitiveness,” Basu said.

He said it was worth noting that China had announced the liberalisation of its currency in June and allowed the renminbi to appreciate further in September following threats of retaliatory tariffs from the US. The renminbi has appreciated about 2.5% in the past month.

Should the renminbi continue to appreciate at 1% to 2% a month, Basu said it was more than enough to fend off protectionist pressure.

“When it comes to the crunch, both sides (China and the US) recognise that beggar-thy-neighbour currency policies and/or protectionism is a great danger,” Basu said.

This article appeared in The Edge Financial Daily, October 21, 2010.