INVESTORS in Asia have been promised 7.2% growth in a survey by the Asian Development Bank, but dramatic political and economic change will make this year a risky ride.

China this month overtook Japan as the world’s largest holder of foreign reserves, a sign that the region’s balance of power in trade is shifting.

Wen Jiabao, China’s prime minister, said Beijing might move some of its $857 billion (£490 billion) reserves out of the dollar and dollar-denominated assets such as US Treasury bonds. Economists say the decision could favour the euro and, to a lesser extent, sterling. China will probably limit its yen assets because of political tensions between the two Asian rivals.

China has already signalled changes in currency policy before a crucial visit by President Hu Jintao to America on which hopes for free trade between the two nations are riding.

The Chinese central bank will widen the trading margins for the yuan, already up more than 2% against the US currency and rising by the day to touch Y8.0 to the dollar.

“China will not pursue shock therapy,” warned central bank governor Zhou Xiaochuan, saying it needed two to three years to adjust its trade balances.

But the prime minister said the government would relax restrictions on companies and individuals holding foreign currencies.

The Chinese have made frantic efforts to assuage anger over their $200 billion trade surplus with the US and there will be prestige purchases from Boeing and other suppliers to coincide with the Hu visit.

There are risks in any currency move that would make Chinese goods dearer for American consumers. Strong anecdotal evidence already suggests that the country’s economic boom is putting upward pressure on wages and causing growing labour shortages in south China’s factories.

The Asian Development Bank said China’s gross domestic product grew by almost 10% in 2005 and Hong Kong’s economy expanded by 7.3%, thriving on the mainland’s success. But the bank warned: “The possibility remains that a shift in investor preferences — which are, after all, volatile — will precipitate a sharp fall in the real value of the dollar.” That could cut demand in America and raise the price of Asian exports.

A plateau in the US interest- rate cycle and signs that the Bank of Japan could soon raise rates suggest that volatility is imminent.

Despite currency worries and $60 oil, Japan’s renaissance and sustained growth in China are still driving the rest of Asia. Funds from Japan are also pouring into Indian equities as wealth in one part of the region fuels expansion elsewhere.

Analysts in Singapore say private-equity funds have raised “substantial” amounts of capital that is yet to be allocated to Asian investments.

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