* Regional fx coordination could allow swifter yuan rise
* Growth forecasts for 2011 unchanged from September report
* Capital inflows a major policy challenge
* Inflation pressures building, risk of asset bubbles
(Adds quotes on forex coordination and Chinese yuan)
By John Mair and James Pomfret
MANILA/HONG KONG, Dec 7 (Reuters) - Capital inflows will be a major policy challenge for emerging East Asia in 2011 as the region outperforms major economies, even as growth will moderate towards 7 percent, the Asian Development Bank said on Tuesday.
Asian currencies have surged this year on a flood of hot money from other regions in search of better returns, raising fears of a potentially damaging trade war if governments try to depress their own currencies to maintain export competitiveness.
Such a risk could be mitigated through a regional currency cooperation framework, which could pave the way for a swifter rise in China's yuan currency, the ADB said.
While export goliath China currently runs a massive trade surplus with the U.S. and Europe, it is a huge net importer of components and intermediate goods from within Asia, putting it at a disadvantage to low-cost manufacturing rivals in the region if its currency appreciates too sharply.
"If there is exchange rate coordination I think the willingness of China to appreciate their currency will be greater," said Iwan Azis, the head of the ADB's office of regional economic integration. "The huge deficit of China vis-a-vis East Asia will not be worsened,
"If you are appreciating alone, then your trade sector will be absolutely damaged. That's why you cannot expect that China will unilaterally appreciate without the appreciation of the rest of Asia," said Azis in a press conference in Hong Kong.
While the ADB said it wasn't calling for anything like a European-style single currency, it said the informal monitoring of Asian currencies and coordinated moves to intervene to correct fluctuations as they arise would smooth inter-regional trade, while speeding the larger process of global rebalancing.
"If there is exchange rate coordination there is room for every single country, not just China, to appreciate more."
Emerging East Asia -- the ASEAN economies plus China, Hong Kong, Taiwan and South Korea -- faced four major risks to its upturn: weakness in major economies, destabilising capital inflows, rising inflation and asset prices, and protectionism, the bank said in its Asia Economic Monitor.
"Competitive non-appreciation -- or 'currency wars' as some put it -- may escalate into trade wars as countries try to preserve international competitiveness and exports," the ADB wrote. (See www.adb.org for full report)
Emerging East Asian economies were forecast to grow 8.8 percent in 2010, led by growth of 10.1 percent in China, before slowing to 7.3 percent in 2011, the ADB said.
While some forecasts for 2010 were revised from the previous ADB forecasts issued in September, the 2011 forecasts were unchanged. For a full table of forecasts, see [ID:nMNA002974]
ASSET BUBBLES
Asia's strong recovery from the global financial crisis has widened interest rate differentials with the rest of the world, and quantitative easing and low interest rates in major economies were expected to keep investors shifting money to emerging markets.
"The unsynchronized global recovery -- red-hot growth in emerging economies against tepid, uncertain recovery in advanced economies -- pose policy challenges," the ADB said.
Although growth will moderate, the narrowing of output gaps, resilient domestic demand and higher commodity and food prices were pushing up headline and core inflation in some economies.
Asset prices were rising quickly, reflected in surging equity markets and housing prices, and the ADB said despite some economies withdrawing monetary stimulus and tightening prudential measures, prices could rise further.
Tightening policy to rein in demand and asset prices could have a short-term impact of attracting more funds and "aggravating inflated asset bubbles," the ADB said.
"There is no magic solution to effectively managing capital flows. Each policy option has its merits and shortcomings and involves difficult trade-offs," the ADB said. (Editing by Kim Coghill)