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IS ANOTHER bubble inflating beneath the economic slump? In their eagerness to fight the downturn, Asian policy-makers could keep monetary policy loose for too long and inadvertently fuel an asset bubble, says HSBC Global Research.
'In Asia, liquidity is far too abundant to keep interest rates this low,' HSBC's senior Asian economist Frederic Neumann has warned in a report. 'The liquidity available will ultimately require an outlet somewhere.'
Excess liquidity is likely to manifest itself in Asia's equity and property markets, Mr Neumann told BT separately. For instance, banks flush with cash will be more willing to lend for property, which will propel the real estate market quickly.
Such a scenario is unfolding in China and Hong Kong, he said. According to reports, new home prices across 36 Chinese cities rose 6.3 per cent year-on-year last month, largely driven by a surge in bank lending.
An asset bubble could also emerge in Singapore, Mr Neumann said. Although the economy is not out of the woods, developers have enjoyed months of buoyant sales. And prices at some projects have risen as much as 7 per cent.
'As prices start to rise, the value of collateral increases, and that reinforces banks' willingness to lend,' he said.
Some Asian policy-makers are attuned to this threat. For example, China's central bank has been nudging up money market rates to try to rein in market sentiment.
Still, 'it is difficult to see how the region could forcefully tighten independently as the rest of the world keeps monetary policy ultra-loose', Mr Neumann says in his report. 'We suspect that asset prices will therefore remain well supported for the coming few years, especially with regard to property.'
Confident investors can try to profit from rising asset prices in this period, but Mr Neumann says that bubbles do not inflate smoothly, and investors should realise that a correction will come.
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