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Fed's Geithner Calls for Flexible Exchange Rates in Asia

Emerging Asian countries should adopt flexible exchange rate regimes and provide central banks with full independence to strengthen their economies, a top U.S. Federal Reserve official said on Wednesday.

Timothy F. Geithner, New York Federal Reserve Bank President, did not single out any particular country in Asia, but in a prepared speech, to be delivered at a dinner for the Economic Society of Singapore, his comments appeared to be partly aimed at China, whose fixed exchange rate has been the source of considerable tension with the United States.

Geithner warned that fixed or partially fixed exchange rate regimes pose a constraint on monetary policy and that while inflation in emerging Asian economies remains relatively low, the pace of credit growth and the behaviour of asset prices provide some evidence of "a growing tension among competing objectives."

Across much of Asia, stock and property prices have surged.

China's benchmark Shanghai Composite Index has more than tripled in value since early 2006, drawing in millions of first-time investors and spooking fund managers around the world.

Valuations have soared to over twice the levels of many overseas markets.

In Singapore, luxury homes rose 33.6% last year.

Independent Central Banks

Geithner -- who has studied Chinese and Japanese and who has lived in India, Thailand, China and Japan -- said that a decade after a devastating financial crisis, emerging Asia's financial system and monetary policy framework require further improvements.

Asia still needs stronger banks and more developed capital markets in order to ensure a more efficient use of domestic savings and a more resilient financial system, he said, while urging greater independence for central banks.

"Few Asian central banks yet enjoy full legal independence, though most now have greater de facto independence than they once had," Geithner said in a speech embargoed for 2040 Singapore time.

"Such independence is best achieved by enshrining it in an institutional framework that provides for legal independence from the government, with accountability for achieving a clearly defined mandate focused on price stability," he said.