Raising interest rates didn’t work. So now Asia’s central bankers and governments are trying curbs on bank lending, construction fees, even environmental regulations 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 gusher of money from overseas lured by the more than 25 Asian interest- rate increases last year. The risk is that the new measures, easily circumvented and effective only for limited duration, may work no better at deflating bubbles before they burst and prices tumble, potentially shaking global markets.
“It doesn’t take a lot of capital inflows to create very bubbly positions, inflationary positions, financially destabilizing positions,” says Bill Belchere, Asian economist at Macquarie Securities Ltd. in Hong Kong. Policy makers, he says, are “a bit confused about how to handle this.”
Developing countries in Asia attracted $98 billion in overseas investment last year, according to United Nations statistics, about four times the average from 1998 to 2004. Investment in emerging markets in other regions declined last year, the UN figures show.
No ‘Perfect’ Solution
“There is too much money globally chasing meager returns, and the liquidity has found its way to asset markets,” says Arjuna Mahendran, chief Asia strategist at Credit Suisse Group in Singapore. “There is no perfect solution. If the flows aren’t absorbed, you’ll have a crisis at some stage.”
A bust would be “highly disruptive to the Asian economies themselves, and also very unpleasant for investors who have been chasing returns in Asia,” says Donald Straszheim, vice chairman of Roth Capital Partners in Newport Beach, California.
Not only did last year’s higher interest rates fail to curb overinvestment, they may even have helped 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.
China’s M2, the broadest measure of money supply, rose 16.9 percent to 34.6 trillion yuan ($4.46 trillion) in December, the highest since figures became available in June 1998. In Thailand, M2 in November reached a record 6.92 trillion baht ($197 billion).
‘Not Going Away’
“The influx is not going away in the near future,” says Masahiro Kawai, dean of the Asian Development Bank Institute in Tokyo. “Raising interest rates won’t work, and they will just attract more money.”
While South Korea’s central bank increased rates three times in 2006, Seoul’s real-estate boom has continued unabated, jeopardizing President Roh Moo Hyun’s pledge to make housing more affordable. That’s forcing the implementation of measures such as home-price caps, stricter borrower screening and curbs on the number of loans a person can take out. Central bank Governor Lee Seong Tae warns that household debt threatens the nation’s longest economic expansion in a decade.
Reserve Bank of India on Jan. 31 raised its overnight rate for the fifth time in a year and said an explosion of credit remains “a matter of concern.” Governor Yaga Venugopal Reddy announced curbs on lending, telling banks to double provisions for real estate, personal loans, credit cards and loans against shares.
China’s Investment Boom
China’s rate increases last year failed to cool an investment boom that stoked the fastest growth since 1995. The central bank also increased the amounts banks have to set aside as reserves four times since June to discourage excessive lending. That helped slow money supply growth to 16.9 percent in December from 19.2 percent in January 2006.
Even so, urban real estate prices in China rose faster. Prices for apartments and offices in 70 cities increased 5.4 percent in December from a year earlier, after a 5.2 percent gain in November, according to the National Development and Reform Commission.
Central bank Deputy Governor Wu Xiaoling said Jan. 25 in Davos, Switzerland, that China will tighten environmental controls to rein in overinvestment. Such measures “would only slow growth marginally,” says David Cohen, an economist at Action Economics in Singapore.
“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, a hedge fund managing about $100 million. “The wealth out there needs to go somewhere.”
Thailand’s measures to ward off “hot money” included seeking cooperation from banks to curb baht loans to foreign investors and the sale of bonds in repurchase agreements. The baht kept rising, reaching a nine-year high on Dec. 18. Then the central bank slapped penalties on early withdrawals by investors in Thai assets.
“We’ve done conventional intervention and nothing worked,” Bank of Thailand governor Tarisa Watanagase said in a Jan. 15 interview. “It was important and necessary for us to put a brake on the sentiment, to create some uncertainty.”
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 1997-1998 Asian financial crisis to halt an attack on their currencies and stop a flight of funds. 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.
“At some point, when a currency appreciates to a strong level, people will ask, ‘Are Asian assets still attractive?”’ says Sim Moh Siong, an economist at Citigroup Inc. in Singapore. That will lead to more balanced investments, without the need for capital controls or other central-bank actions, Sim says.
Asian governments might also do more to encourage companies and individuals in their countries to invest more overseas, economists say.
Thailand and South Korea have already moved to relax controls on money moving abroad. South Korea suspended taxes on gains from overseas fund investments and let businesses and individuals buy more offshore property, while Thailand raised the ceiling for overseas investments for companies and individuals.
“Asian governments must liberalize their economies to allow consumers and investors to do their thing,” says Macquarie’s Belchere. “Because governments aren’t doing that, it pushes central banks into a corner. They have to do something to absorb all that liquidity, all those inflows, or they risk a massive inflationary breakout.”
--With reporting by Hans van Leeuwen in Sydney, Rob Delaney in Davos, Switzerland, Matthew Benjamin in Washington and Beth Jinks in Bangkok. Editor: Dwyer (mfr/rxj)
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-0- Feb/04/2007 16:08 GMT