Asset bubbles top threat to Asia

Asset bubbles are the No 1 threat to financial stability in Asia, meaning policymakers should avoid an excessive focus on inflation, said Norman Chan, Head of Hong Kong's de facto central bank.

Based on Asia's experience in the past 20 years, the biggest threat "is from asset bubbles, rather than inflation", Chan, the head of the Hong Kong Monetary Authority, said in a speech posted on the organisation's website yesterday. "I'm not saying that Asia does not need to worry about or guard against inflation, but I think we should focus more on the risk of asset bubbles forming and the associated damages."

Chan said more than HK$640 billion (Dh303.1bn) had flowed into Hong Kong since October last year, helping to drive up housing prices for 10 straight months. Donald Tsang, the city's chief executive, said on November 13 that he was "scared" that money flowing into Asia because of low interest rates in the US could lead to another crisis in the region.

Chan did not say Hong Kong or Asia had bubbles. It's difficult to assess when they are forming, he said.

"If it's considered that bubbles have started to form, we should adopt appropriate and strong measures to prevent the bubbles from expanding too much," Chan said in his speech.

Financial officials in Japan and China, Asia's two largest economies, warned last month that the Federal Reserve's interest-rate policy risks spurring speculative capital that may inflate asset prices and derail the global economic recovery.

"The current extremely loose global monetary policies and huge capital inflows provide the ideal conditions and ingredients for Asian asset bubbles to grow, so the potential risk of asset bubbles is not small," Chan said.

Hong Kong's monetary policy is limited by the local dollar's peg to the US currency, meaning that the city's interest rates track those of the US. Prices for existing Hong Kong homes rose 29 per cent this year, according to the Centa-City Leading Index, a weekly measure developed by Centaline Property Agency and the City University of Hong Kong.

The World Bank Managing Director Juan Jose Daboub is confident authorities in China recognise the threat of asset bubbles in the world's third-largest economy. "With any kind of stimulus there is always a risk of overdoing it or prolonging it for too long, and so the risk that you're highlighting is there," Daboub, who is on an official visit to Egypt, said at a news conference in Cairo.

China's growth accelerated to 8.9 per cent in the third quarter on record lending and a $586 billion (Dh2.1 trillion), two-year stimulus package, helping Asia to lead the recovery from the global economic slump.

"The fact that there is a China and there is an India and there are other poles of growth that are popping up has made it possible for the impact of the crisis to be less in certain countries," Daboub said. The World Bank believes that Chinese authorities understand the risks of an asset-price bubble and "will take the measures that they believe are more appropriate. They have done so in the past", he said.

The worst of the global recession is over and the world's economic recovery has started "unevenly – that is not at the same pace or at the same speed for all countries", Daboub said.

"That doesn't mean that the impact of such recession has yet been overcome."

 

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