>MACRO ASIAN ECONOMICS (HSBC)

Blowing bubbles
Money’s too loose in Asia

• Excess liquidity in Asia raises the spectre of asset bubbles, especially in property
• The bubble will grow for several years to come if policy-makers don’t step up
• But lingering growth risks will reinforce caution, pushing asset prices up further

Here we go, again
We’ve been here before. A crisis erupts, markets panic, and policy-makers, reading the news along with everyone else, slash interest rates to pump up growth. In principle, this is perfectly all right. The trouble is, however, that if policy stays too loose for too long, it will blow bubbles. In Asia, liquidity is far too abundant to keep interest rates this low. Yet, it appears unlikely that the region will strike out on its own and tighten while everyone else is stuck in the emergency room. In short, the seeds are being sown for Asia’s next bubble. The world has not changed, it just moved places.

Chapter 1: Still standing
Two points to note. First, liquidity is extremely abundant in Asian financial systems. There is no credit crunch to speak of. Sure, banks have become more cautious since the crisis, but this is a cyclical response and does not reflect a breakdown in the financial transmission mechanism. Second, Asia, unlike other parts of the world, does not suffer from a balance sheet crisis, allowing leverage to build quickly if rates stay low.

Chapter 2: Bubble economics
Monetary policy is far more powerful than a fiscal stimulus, but develops more gradually over time. Low growth and lingering uncertainties are preconditions for bubbles to emerge, as they force officials stay accommodative. Asset price increases can occur even if growth fundamentals appear
unsupportive. In fact, the divergence of asset values from their fundamentals is precisely why the thing is called a “bubble”.

Chapter 3: The trilemma, again
For Asia to tighten independently, it needs to let go of the idea of exchange rate competitiveness. But such beliefs are so deeply ingrained after decades of export-led development that aggressive, independent action appears unlikely.

To see full report: ASIAN ECONOMICS