SEOUL (Reuters) - China kept up a drumbeat of criticism of U.S. easy money policies on Tuesday, warning two days before a G20 world economic summit that Washington could destabilize the global economy and inflate asset bubbles.

A model presents a traditional Hanbok during a rehearsal of an event for the spouses of leaders who will attend the G20 Seoul Summit, at Changdeokgung Palace in Seoul November 9, 2010. The G20 Seoul Summit will be held in Seoul November 11-12. REUTERS/Truth Leem

German Chancellor Angela Merkel dismissed U.S. calls for numerical limits for current account balances but said she hoped to avoid a confrontation at the Seoul summit between China and the United States over trade and currencies.

“I don’t think much of quantified balance of payments targets,” Merkel told Tuesday’s Financial Times, warning that monetary tensions could fuel protectionism.

U.S. Treasury Secretary Timothy Geithner has already backed away from the proposal to set targets for current accounts gaps, and Japanese Finance Minister Yoshihiko Noda said it was not likely that the G20 would agree on any hard numbers.

“It’s more likely that countries will agree a common approach, and finance ministers from the member countries will debate the details later,” he told reporters in Tokyo.

The U.S. Federal Reserve’s new $600 billion bond-buying program has drawn global scorn because of concerns it will send a flood of cash into the world economy without doing much to reinvigorate a lackluster U.S. recovery.

Ma Delun, a deputy governor of the People’s Bank of China, said he was concerned the Fed’s spending spree may undermine efforts to balance out global growth.

The Fed’s program “may add risks to the global economic imbalance, put pressure on emerging markets to adjust their international balance of payments and could also stir the formation of asset bubbles, all of which require our vigilance”, Ma said in Beijing.

In the latest move by an emerging economy to brake inflows of “hot money”, Taiwan said on Tuesday it would bar foreign investors from placing more than 30 percent of their funds in Taiwan in local government bonds and money-market products, reviving a curb scrapped in 1995.

PROTECTIONIST WORRIES

Leaders of the Group of 20 economies meet on Thursday and Friday, eager to show they have not lost the cooperative spirit forged during the depths of the financial crisis in 2008.

But growing discontent over exchange rates and trade has exposed deep international rifts, while Ireland’s worsening debt troubles have revived euro zone bond market jitters, a reminder that global recovery remains vulnerable to financial turmoil.

The risk premium investors charge for holding Irish and Portuguese bonds reached new peaks on Tuesday amid concerns over their ability to rein in ballooning budget deficits.

If G20 leaders are unable to calm tensions this week, it could intensify investor concerns that global cooperation is giving way to national policies that may not be in the world economy’s best interest.

High on the worry list is protectionism.

Although G20 finance leaders pledged last month to shun competitive currency devaluations, the Fed’s bond-buying program has deepened concerns that the U.S. dollar is headed lower, driving up exchange rates in other countries.

“The greatest danger that threatens us is protectionism, and we are still not taking enough steps to ensure genuinely free trade,” Merkel told the Financial Times, voicing concern at steps by the U.S. Congress to raise non-tariff barriers.

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China’s tight grip on the yuan’s rate means other fast-growing emerging markets such as Brazil end up taking the brunt of the currency adjustment.

Taiwan is only the latest to act to counter that.

World Bank President Robert Zoellick called for a new global currency system, perhaps with gold as a reference point. The idea drew criticism from many policymakers and economists and there was no indication it was on the G20’s agenda this week.

Li Daokui, an academic adviser to China’s central bank, said China wanted a more “reasonable” global monetary system but its objective was not to replace the dollar with the yuan.

SECURITY TIGHTENS

Seoul raised its security alert to its highest level due to concerns of violent anti-capitalist protests -- a common feature of past G8 and G20 summits -- and worries that rival North Korea may try to stage an incident to embarrass it.

A large number of protests are expected with the biggest rally of unionists and anti-capitalists expected on Thursday. Some 50,000 police officers have been dispatched.

Authorities have set up a 2 km (1.25 mile) security zone around the main summit venue, and a special law gives police greater authority to thwart demonstrations and deploy troops.

Keeping the political peace will be a priority for G20 leaders inside the security zone.

Despite well-publicized differences, Geithner insisted there was broad agreement among G20 members -- including China -- on narrowing global imbalances between cash-rich exporters and debt-laden consumer countries.

G20 leaders agreed last year on a “framework” for more balanced growth, which called on surplus countries such as China to bolster domestic demand while the United States and other big importers boosted savings and investment.

“I’m very confident that you’re going to see very strong consensus on this basic framework,” Geithner told an audience of Indian business leaders. “The Chinese are very supportive of it. It has a lot of benefits to them.” (Additional reporting by Jeremy Laurence in Seoul, Stanley White in Tokyo, Aileen Wang and Ben Blanchard in Beijing, and David Lawder in New Delhi; Editing by John Chalmers and Paul Taylor)