Stock markets are overreacting to the worldwide economic slowdown and should be more concerned about mounting financial risks in Asia, according to analysis released last week by the Conference Board.

While the U.S. and other economies are heading for a slowdown, a recession is not in the cards, according to the report.

“Far more [worrisome] are financial risks that are growing outside the U.S. and outside traditional equity and bond markets — especially in Asia,” says Gail Fosler, Executive Vice President and Chief Economist of The Conference Board, in a press release. “There is a substantial and growing excess of savings that is misallocated globally and giving rise to huge waves of liquidity that may misprice risk in the short term and create credit and/or market crises. Global trade imbalances are heavily influenced by financial motivations, which arise in part because of the inability of emerging markets to allocate domestic savings efficiently.”

Businesses and governments in many Asian countries need to hold precautionary savings in foreign currencies, such as the U.S. dollar and the Euro, Fosler says. This gives them a natural hedge since these currencies are increasingly required for trade and low-cost financing.

The U.S. trade deficit soared to a record high of $61.7 billion last year. The U.S. government has been pressing China to stop linking its currency to the U.S. dollar and instead move to a more flexible currency system in a bid to cut the U.S. trade deficit.

On May 17, the Bush administration warned China that it could be cited as a currency manipulator and could face economic sanctions unless it moves swiftly to overhaul its currency system. U.S. manufacturers and other critics, including Democratic and Republican lawmakers in Congress, contend China’s currency system puts U.S. companies at a big competitive disadvantage and has contributed to the loss of U.S. factory jobs. Chinese Premier Wen Jiabao has said China regards the reform of the renminbi (RMB) exchange rate as an issue of sovereignty and will never yield to any external pressure to change it.

In a recent speech, Federal Reserve Chairman Alan Greenspan said the soaring trade deficits probably will not be helped by China revamping its currency system. Greenspan contends U.S. companies are likely to turn to other countries, such as Thailand or Malaysia, for goods, rather than U.S. producers.

“So essentially what we will find iswe’re importing from a different area, but we will be importing the same goods,” Greenspan said in the speech.

He also said letting the Chinese currency move higher against the dollar would increase prices American shoppers pay for Chinese goods in the U.S. In addition, Australia and China began talks on May 23 towards a free trade pact, boosting China’s efforts to be accepted as a full market economy and Australia’s bid for greater access to the world’s most populated marketplace.

“Since [early May], the political pressures on China from the U.S. have increased further,” says Tim Clayton of Gloucester, Scotland-based Investica Ltd.

“The U.S. political pressure will tend to increase Chinese resistance to a move, but the preparations still appear to be taking place,” Clayton says. “Regional governments appear to be expecting a China move to make at least a small adjustment to the renminbi fairly quickly.

“Overall, it still looks to be a question of when, not if, there is a change with the renminbi allowing slightly greater flexibility. The exact timing is uncertain, but it looks close,” he adds.

It also appears the initial market reaction may be fairly limited, but the medium-term trends should still be for stronger Asian currencies against the dollar. The Malaysian peg would also likely change, Clayton says.

Stronger Asian currencies would take some upward pressure off the Euro, he says.

In addition, in mid-May, China announced new tariffs it hopes will hold down surging textile exports in an effort to avert a trade war with the U.S. and Europe. Beijing took the step despite accusing Washington of treating China unfairly and saying earlier U.S. and European market barriers were to lame for the surge in Chinese textile imports after a worldwide quota system expired Jan. 1.

The new measure takes effect June 1 and will raise tariffs on 74 types of goods by as much as 400 percent.

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