It is time for Asian economies to grow up
MORE than ever, I’m convinced that a combination of the West’s ultra-loose monetary policies and Asia’s juvenile reaction to the tidal wave of cheap money this has created are fuelling a new bubble. So I was fascinated to read a series of reports yesterday arguing a very similar point. They are from HSBC’s global research team, led by chief economist Stephen King, and make a powerful case that the world is trapped yet again in a dangerous monetary merry-go-round.
King and his colleague kick off with their forecast that US interest rates are set to remain very low for the forseeable future, something undoubtedly made even more likely by yesterday’s downwards revision to third quarter US GDP growth. This is partly due to the Fed’s interpretation of its triple mandate, which is quite different to that of other central banks: it is aiming for price stability, full employment and low bond yields.
Predictably, low US interest rates are fuelling a desperate search for yield; investors who were once tempted by CDOs are now piling into emerging markets, which they rightly perceive as healthier than high-debt, low-growth Western nations. This is boosting emerging asset prices, putting downwards pressure on the greenback and upwards pressure on emerging market currencies.
The trouble is that many Asian economies, desperate to help their exporters, are refusing to allow their currencies to appreciate, intervening instead to sell their currencies and to purchase greenbacks. The result is continuing growth in forex reserves, many of which are recycled in US Treasuries, putting downwards pressure on US yields and further fuelling the original problem. It is a vicious circle which is once again endangering global stability.
Asian officials face a fundamental dilemma: while the region has decoupled from the West in terms of growth, central banks in the region continue to shadow the Fed to varying degrees, which means that much of South East Asia (and the Gulf) remains part of a dollar zone in all but name. Monetary conditions that may be justified in the US, which is still lumbered with huge banking problems, unemployment and weak growth, are far too accommodative relative to economic fundamentals in Asia, which is recovering strongly. The big test over the coming two years, and one that will determine whether Asia itself will succumb to a destructive asset boom and bust, is whether the region’s central banks will tighten sufficiently and independently of central banks elsewhere. To fully decouple in terms of economic performance – and continue to grow into a new dominant global force – Asian nations must now forge their own monetary policies.
It is clear that some of the ample liquidity in Asia’s financial systems – created by foreign inflows, as well as low domestic rates interacting with a healthy banking system – is ending up in speculative ventures. In many countries, credit is growing significantly faster than nominal GDP. Asset prices are bouncing back, with property prices in Singapore close to all-time highs. All of this is being helped by the fact that optimistic local investors never really felt that the Western crisis would dent their own returns.
The solution: Asian nations need much higher interest rates; above all, they must allow their currencies to appreciate substantially against the greenback. In other words, they need to grow up – and fast.