Asia at risk of asset bubbles:Fosler

Source : Business Times – 12 Sep 2009

THE president of a prominent US research group has joined the growing ranks of economists warning against escalating asset prices in Asia.

The huge fiscal stimulus packages and flush liquidity set ‘the stage for asset bubbles to move out of the United States and into Asia’, said The Conference Board’s Gail Fosler at the CapitaLand International Forum yesterday.

Asia needs to keep a close eye on this risk, she emphasised. ‘Valuations at which acquisitions are made, at which underlying business investments are made, these acquisition prices are going to be almost generically extremely high, and I think this is going to pose a significant business challenge.’

Several economists have cautioned against potential speculation in the region’s equity, real estate and commodity markets after governments turned to fiscal stimulus and looser monetary policy to counter the downturn. Bank of China’s vice-president Zhu Min also said this week that liquidity could be heating up these markets.

Observers are training their attention on China, where property prices have risen rapidly on the back of record lending and growing optimism. Home prices in the country’s 70 biggest cities went up one per cent year-on-year in July, and again by 2 per cent year-on-year last month.

Property prices increased even as business sentiment in the real estate sector stayed weak, Ms Fosler pointed out. ‘There is just a huge amount of money floating around in the international marketplace seeking a home.’

The Chinese government – which pushed out four trillion yuan (S$832 billion) in stimulus measures and aggressively extended credit – is unlikely to tighten policies soon, said Nanyang Technological University economics professor Tan Kong Yam.

Technocrats in the People’s Bank of China and China Banking Regulatory Commission may be inclined to do so to avoid resource misallocation and more non-performing loans, he said. But he believes that they will be overruled by politicians who are more concerned about creating jobs and maintaining stability.

Policy tightening in China is likely to be ’slightly behind the curve’, Prof Tan said, projecting an increase in the reserve requirement ratio in Q4 this year and a hike in interest rates only in early 2010.

China’s economic performance will have wide-reaching impact. Prof Tan noted that Hong Kong, Taiwan, Australia and Korea are regions with the highest level of dependence on the Chinese growth engine. The Conference Board’s Ms Fosler even commented that China influences Asia’s growth more than the US.

Globally, economic growth rates will fall to a more ‘reasonable’ level after the crisis, Ms Fosler said. While they will be much lower than the rates achieved during the booming period of 2004-07, they will not be too far below those seen over a longer period of 1996-2006, she explained. ‘The new normal is in some sense the old normal.’

She also believes that US consumers will become more frugal and save more as their income expectations fall. But a contrary view came from another speaker at the forum, DePaul University professor James Shilling, who expects savings to fall should governments raise taxes