China tightening to be gradual: ADB's Kuroda

DAVOS, Switzerland (Reuters) - China was unlikely to take drastic monetary policy tightening measures as it has no alarming inflationary pressures at the moment, the head of the Asia Development Bank said on Thursday.

Haruhiko Kuroda, in Davos to attend the World Economic Forum, also told Reuters that investors must be aware of the risks dollar carry trades have, as an eventual rise in U.S. interest rates or a stronger dollar would hurt those trades.

China easily beat its 2009 growth target after a blistering fourth quarter performance that set the stage for further monetary tightening and put it on course to overtake Japan to become the world’s second-largest economy.

Alarmed by a new burst of credit at the start of this year, China has been taking a series of smaller steps to contain buoyant lending and prevent the economy and its markets from overheating.

“Generally speaking inflationary pressures are not piling up. At some point they might need measures to raise interest rates. But it’s more like expansionary monetary policy would become less expansionary, toward a neutral level,” said Kuroda, Japan’s former vice finance minister of international affairs.

“It’s unlikely China would take drastic measures given no rise in inflationary pressures.”

Earlier Vice-Premier Li Keqiang said in a keynote speech in Davos that the government needed to stick with its moderately easy monetary policy and it needed to manage inflation in an appropriate way.

Near-zero U.S. interest rates have fueled a global carry trade boom, encouraging investors to borrow in dollars and invest in emerging economies or commodities.

“It’s a naked trade. People need to understand the risky nature of carry trades,” said Kuroda.

“If the dollar goes up or U.S. rates go up, and you will make losses. Carry trades - it’s a fact that it’s speculative and it’s risky by definition,” he said, adding however that the recent phenomenon was no cause for concern.

Editing by Jon Boyle