Cheap money is fast becoming an expensive habit for Asia.
Easy liquidity has already pushed some asset prices out of kilter. Chinese stock markets are clearly overheated.
And while the fallout from a collapse in share prices in Shanghai and Shenzhen may have limited economic impact, bigger trouble is brewing elsewhere: in the labour markets.
Monetary conditions kept too loose for too long appear to have firmed inflation expectations.
Wages are rising rapidly, recording annual growth rates ranging from about 5% in Singapore and 8% in China and the Philippines to a staggering 14% in India.
Corporate profitability and expansion are now at risk.
A recent Duke University/CFO Magazine survey reveals that chief financial officers in Asia are bracing for a 10% increase in their wage bill in the next 12 months.
The CFOs expect labour productivity—output per hour worked—to grow only 4%.
A previous round of the survey, conducted at the end of last year was much more sanguine. It projected wage growth to outpace productivity gains by only about 1%.
Most CFOs in Asia are still optimistic about economic growth in the region. Yet, they are now responding to cost pressures by paring their capital expenditure plans and by tightening their marketing and technology budgets, according to the Duke/CFO poll.
“First signs of weakness appear in Asia’s growth story,” the press release says.
The survey covered 172 companies in India, China, Japan, Singapore, Hong Kong, Taiwan, Indonesia, Thailand and Malaysia, as well as local units of US and European multinationals.
Squeezing growth out of underpriced capital is a good way for policy makers to pull an economy out of a bad patch, and for politicians to get a rally going in asset prices. It isn’t a recipe for keeping the good times rolling.
Yet that’s what seems to be happening.
After a measly 27 basis-point increase last month in state- mandated bank deposit rates, one-year funds in China now pay 3.06%. Consumer prices in rural China rose 3.4% from a year earlier in April.
State Bank of India, the country’s biggest lender, pays 8.25% on a one-year deposit even though the annual inflation rate faced by farm workers was 9.5% in April.
Those Asian policy makers who seek to actively manage inflation using short-term interest rates have a dilemma.
If they raise interest rates in response to a tightening job market, they invite yield-searching speculative capital.
And then, if the central bank buys the incoming dollars, domestic liquidity increases, stoking inflation.
And if the central bank doesn’t buy the dollars, it risks making the local currency too expensive—too quickly—for exporters.
This happened in New Zealand. With annual growth in private sector wages, adjusted for productivity, close to a historic high, the Reserve Bank of New Zealand increased the benchmark official cash rate to 8% last week.
It was a surprising decision, which sent the New Zealand dollar to its highest in 22 years as carry traders zoomed in on the yield. Then, in an even more unexpected move, the central bank sold the local currency yesterday for the first time since floating it in 1985.
New Zealand is still on the right path.
The strategy of restraining interest rates to avoid inviting in “hot money” is eventually self-destructing because it allows inflation to take hold in the domestic economy.
Asian companies will eventually stop investing if the consumer doesn’t have the purchasing power to buy their goods.
In most developing Asian countries, reliable, high-frequency data on productivity and wages simply don’t exist.
This is a serious shortcoming. Production methods nowadays are modern; and even labour-surplus economies such as China and India are prone to skilled-worker shortages.
If the growing nervousness of Asian CFOs is a forward- looking indicator, then it may be time for central bankers in the region to do some soul-searching.
They have been complacent about wage inflation and their ability to control it. They are also wrong, perhaps, to view money-supply growth—alarming in many countries—as irrelevant. That indicator may herald an avalanche of price increases. BLOOMBERG