Getting back on track

Source : Straits Times – 14 Nov 2009

Stopping the bubbles

HONG KONG Chief Executive Donald Tsang warned yesterday that asset prices in places like Singapore, South Korea and Taiwan were ‘incompatible and inconsistent with economic fundamentals’ and could lead to bubbles.

Mr Tsang told the Apec CEO Summit at the Suntec ballroom that the seeds of financial crises often come from government-implemented fiscal and monetary policies.

He cited the steps Japan took during its recession in the early 1990s and cautioned that the measures the United States is now implementing may lull it into a similar policy trap.

In the 1990s, near zero interest rates drove resources out of Japan and into the rest of Asia, which was experiencing rapid growth. This led to Tokyo becoming one of the biggest lenders in the world.

But it eventually led to asset bubbles forming in Asian countries, which imploded during the 1997 financial crisis and hurt Japan.

‘Leaders need to watch out… America is doing exactly what Japan did the last time with reduced interest rates and encouraged lending,’ said Mr Tsang.

He added that the weakening US dollar has replaced the yen as the currency of choice for carry traders with investments pouring into Asia.

He said the influx of capital was driving up asset prices in Asian countries – a worrying trend because they were ‘out of sync’ with the Asian export portfolio and its internal capacity.

‘Leaders need to look at these issues with foresight to prevent a repeat… There is a need for global cooperation since the world is so well connected now,’ he added.

World Bank president Robert Zoellick also identified Asian asset bubbles in an interview with Bloomberg on Wednesday, warning that they that could pose risks to the global economy next year.

He said that the region must be vigilant and that solutions will not be easy, although he suggested using other tools before raising interest rates to contain asset price surges.