Costello warns of market 'tsunami'
Posted 6 hours 23 minutes ago
Updated 6 hours 21 minutes ago
Federal Treasurer Peter Costello says international markets will be hit with a "tsunami"-like effect when China eventually adjusts its currency
China has been under strong international pressure to float the yuan. Mr Costello agrees it should do so but he expects that when it does there will be major volatility.
"The day they decide to float their currency you are going to get huge reversals of financial flows around the globe, which will affect all exchange rates, that's why I compared it to a tsunami," he said.
Mr Costello says his comments have nothing do with the prospect of the Reserve Bank lifting the benchmark interest rate after they meet on Melbourne Cup day.
"This has nothing to do with the Reserve Bank and its meeting. This is an observation about the global economy, looking out over the horizon," he said.
"And the point I made yesterday when I was asked about Chinese growth is I think Chinese growth will continue. It will go in fits and starts. It won't be even growth.
"It has a long way to go but the Chinese at some point will have to make a decision on their exchange rate."
He says as China becomes more open and democratic, it will be good for the world - but there will be a lot of dislocation along the way.
"This is not something that's going to happen in the next couple of weeks. This is something that could happen in a year's time or in five years' time," he said.
"But you are seeing a lot of volatility in international financial markets at the moment. I think during the period I've been Treasurer, the Australian dollar has been as low as 47 cents against the US dollar, and now I think it's as high as 90. That's doubled in recent years."
Mr Costello also says the US subprime crisis is sending ripples through the global economy.