KUALA LUMPUR (Aug 1): The Malaysian ringgit remains undervalued in comparison to its historical value against the US and Singaporean dollars, according to Stephen Xu Sitao, chief economist at Deloitte China.

"Two economies are tightly linked, bilateral relationships need to be tightly linked. In this case, the ringgit is out of whack," Xu said, following his keynote address at the Asian Institute of Chartered Bankers' (AICB's) conference on China's banking and financial industry today.

Malaysia is extremely competitive in terms of its valuations and cost convergence, as it is one of the more functional emerging markets in Asia, he said.

Xu also noted  Malaysia does not have to worry about overexposure to China's investment in the country yet, as the Malaysian economy is still diversified in terms of its foreign partners.

This is despite the Republic being its largest trading partner, with the gap between China and US as Malaysia's trading partners "only expected to widen," Xu said.

He referred to the example of Australia, which had both been over-reliant on China for commodity exports and had misjudged the country's policy direction.

"The Malaysian central bank and other authorities need to realise that China's policies can be even more impactful than regional drivers," Xu said, recommending these institutions make an effort to understand China's policy objectives, as well as the constraints surrounding it.

For China, Xu recommended it embrace a slower gross domestic product (GDP) growth rate and more exchange rate flexibility, as it proceeds on deleveraging its debt.

The most important factor to watch is the credit growth in the country, especially among the younger Chinese which have a reduced aversion to credit, Xu said.

While the restrictive policies on credit may not be the best route to take, that China is able to adopt such measures is indicative of its economic strength, Xu added.

"If China continues to rely on double-digit growth, it will definitely [result in] a financial crisis," Xu said.