Raising interest rates did not work. So now, Asia’s central bankers and governments are trying to put curbs on bank lending, construction fees, and even environmental rules in an effort to combat asset bubbles that have made Seoul the world’s second-priciest city, and Mumbai apartments cost as much as Manhattan’s.
The measures aim to control lending and stem a gush of money from overseas lured by the more than 25 Asian interest- rate increases last year. The risk is that these may work no better at deflating bubbles before they burst and prices tumble, potentially shaking global markets.
Developing nations in Asia attracted $98 billion (Rs40,000 crore) in overseas investments last year, according to UN statistics, about four times the average from 1998 to 2004. Investment in emerging markets in other regions declined last year, the UN figures show.
“There is too much money globally chasing meagre returns, and the liquidity has found its way to asset markets,” says Arjuna Mahendran, chief Asia strategist at Credit Suisse Group in Singapore.
Not only did last year’s higher interest rates fail to curb over investment, they may even have helped to draw in all that cash. The People’s Bank of China raised its benchmark rate twice last year; while higher rates kept consumer prices contained, they encouraged even more investment and growth by offering enhanced returns.
Masahiro Kawai, dean of the Asian Development Bank Institute in Tokyo, says, “Raising interest rates won’t work, and they will just attract more money.”
While South Korea increased rates three times in 2006, Seoul’s real-estate boom has continued unabated, endangering President Roh Moo Hyun’s vow to make housing more affordable. Central bank governor Lee Seong Tae warns that household debt threatens the nation’s longest economic expansion in a decade.
The Reserve Bank of India on 31 January raised its overnight rate for the fifth time, and said an explosion of credit remains “a matter of concern”. Governor Y.V. Reddy announced curbs on lending, telling banks to double provisions for real estate, personal loans, credit cards and loans against shares.
China’s rate increases last year failed to cool an investment boom that stoked the fastest growth since 1995. The Chinese central bank also increased the amounts banks have to set aside as reserves four times. That helped slow money supply growth to 16.9% in December from 19.2% in January 2006.
“Short of establishing currency controls like we’ve seen in Thailand, I don’t think measures to reduce property prices across the region will have much of an impact,” says Eugene Kim, chief investment officer of Tribridge Investment Partners Ltd in Hong Kong.Thailand, Indonesia and South Korea have reason to be suspicious of conventional methods. At the behest of the International Monetary Fund, their central banks raised interest rates during the 1997-98 Asian financial crisis. The higher rates hurt businesses and put a crimp in spending, plunging the economies into recession.
Economists say central banks’ tinkering won’t work unless governments in the region reinforce those actions by opening up their economies. Allowing Asian currencies to continue appreciating will limit inflows and deter speculators, they say.