By Yoko Nishikawa and Linda Sieg,
YOKOHAMA (Reuters) - Asia-Pacific economies, including China and the United States, were laying the groundwork on Sunday for a vast free trade area, but frictions over currencies and geopolitical rivalries threatened to undermine regional harmony.
China and the United States turned down the heat in an acrimonious dispute over currencies and trade imbalances at a meeting of finance ministers from the 21-member Asia-Pacific Economic Cooperation (APEC) forum.
Meeting in Japan's ancient capital of Kyoto on Saturday, the finance chiefs declared members will move toward more market-determined exchange rate systems reflecting underlying economic fundamentals, and refrain from competitive devaluation of currencies.
U.S. Treasury Secretary Timothy Geithner told reporters on Saturday that while there was now broad consensus to develop some form of policy framework to avoid excessive current account imbalances, specific targets should not be expected from a Group of 20 summit in Seoul on Nov 11 and 12, just ahead of an APEC summit.
"It's not something you can reduce easily to a single number," Geithner said. He had earlier suggested countries should aim to cut surpluses or deficits to a targeted share of gross domestic product over time.
Geithner was also forced to fend off criticism that the United States was deliberately weakening the dollar after the U.S. Federal Reserve announced last week it was in effect running the printing presses to buy another $600 billion in government bonds in an effort to reinvigorate the flagging U.S. economy.
The series of APEC meetings in Yokohama, just south of Tokyo, will conclude next weekend in a summit that brings together U.S. President Barack Obama, Chinese President Hu Jintao Japanese Prime Minister Naoto Kan and other leaders of fast-growing nations around the Pacific rim.
APEC members have signed more than 100 bilateral and other mini-free trade agreements with each other, and stitching them together somehow into an area that accounts for 44 percent of global trade is an ambitious task.
HOT MONEY INFLOWS
"I think FTAAP is a very good idea," Asian Development Bank President Haruhiko Kuroda said in an interview on Sunday, referring to the Free Trade Area of the Asia-Pacific.
"Rather than doing bilaterally or with a small number of countries, free trade deals work better when more countries get involved because that will not only benefit member countries but also reduce the negative impact on non-member nations, and that could be a plus for the global economy."
Kuroda said regional coordination was needed to deal with the differing rates at which currencies are appreciating in Asia's hot emerging markets.
"Southeast Asian currencies are appreciating, but the Chinese one is not. There is a gap among emerging market currencies," Kuroda said. "This is causing a big problem, so we need to talk more about currency cooperation in the region.
"If regional coordination and cooperation progress, it will help ease global imbalances," Kuroda said.
Capital inflows into developing countries have been massive. Flows into emerging market funds reached $46.4 billion in the year to the fourth week of October compared with $9.4 billion for all of 2009, according to Global fund tracker EPFR.
That has prompted some emerging economies to implement capital controls.
Kuroda said capital controls were necessary for countries that face problems of hot money inflows, which could be reversible in the short term. But controls on inflows that are mainly for long-term investments should be avoided, he added.
"You need to look at the type of capital inflows, whether a country has a strong, supervised financial system or not. When a country's economy is overheating and needs to stop such inflows, it (capital control) is needed," Kuroda said.
"But if that's not that case, you don't need it."
Obama, who will attend the APEC summit in the wake of his Democratic Party's disastrous showing at the polls, is now on a 10-day Asian tour aimed at boosting exports.
Washington is also pushing a nine-member Transpacific Partnership (TPP) free trade initiative. Japan said on Saturday it would start talking with other countries about the U.S.-led deal, but stopped short of pledging to join negotiations formally, reflecting worries over the fallout for farmers.
Adding to the potential for contention at APEC are security strains as the region confronts an increasingly assertive China, itself impatient with U.S. efforts to shore up influence.
Tokyo, Washington and Southeast Asian nations have grown increasingly wary of China's intentions as it spends heavily to modernise its military, sends its navy further afield and asserts sovereignty over the contested South China Sea.
Sino-Japanese relations have chilled markedly due to a feud over claims to isles in the East China Sea near potentially huge maritime gas and oil reserves.
Russia also leapt into the fray this week when President Dmitry Medvedev visited part of an island chain north of Japan claimed by both countries, sparking another row with Tokyo.
(Editing by Bill Tarrant)