Rhetoric on the Asia story has swung dramatically. In 2009, growth in Asia was applauded for driving the global recovery. Today, you are more likely to hear about the impending Asian bubble. What has brought about this change?
Comparing the current price of prominent Asian markets to their trough shows they have recovered earlier and rebounded more strongly than most of their western counterparts. Many indices have recovered most of their losses. While this alone does not necessarily suggest the region is in bubble territory or threatened by rampant inflation, it is enough to raise concerns, especially given the high growth expectations in the region.
HSBC's economists expect GDP in Asia, excluding Japan, to grow by 7.9% in 2010. This is at the higher end of consensus forecasts and well above the forecast for global GDP growth of 2.9%. This strong growth is predicated on the regional heavyweights China, India and Indonesia growing at 9.5%, 7.8% and 5.8% respectively.
These high growth expectations, to some extent, are the result of government stimulus measures, including low interest rates and increased loan growth. This has led to concerns that the price to be paid for this stronger-than-expected growth could be a combination of high consumer price inflation and asset bubbles.
Recent adverse weather has already pushed food prices higher across the region. And in China some local governments have succumbed to pressure to raise the minimum wage, while others have increased salaries for civil servants. Inflation is already a concern in India where January's wholesale price inflation was at 8.56% year on year, following a 7.31% increase in December. However, it is not as big an issue in China where the consumer price index recorded 2.7% year on year in February.
While the potential for bubbles is evident, a cursory examination of the indicators in major economies around the region suggests there is not yet any overt sign of macroeconomic imbalances or excessive financial flows suggestive of an imminent destabilising move in asset or consumer prices.
Of the Asian economies, China's appears most at risk. China's GDP for 2009 registered 8.7% year-on-year growth, overshooting the government's target of 8%, while new outstanding bank loans in January topped CNY1.5 trillion, a fifth of the increase in bank lending targeted for this year. However, apart from China, credit growth in Asia has not been particularly strong. And while China was aggressive in stimulating its economy, it is now running a relatively modest fiscal deficit of 2.8% of GDP, which is expected to rise to 3.3% in 2010 – still better than other economies.
Leading indicators suggest the global economic recovery will gain momentum in 2010 and the more export-oriented markets in the Asean (Association of Southeast Asian Nations) region – Indonesia, Malaysia, Singapore and Taiwan – should benefit most from a pick-up in demand.
However, central banks in Asia may not raise interest rates aggressively until they feel confident that the export recovery is sustainable. Regional central banks' ability to sterilise large capital inflows into Asia will determine their success, or lack of it, in forestalling the formation of asset bubbles. The return of capital flows into the region is already putting upward pressure on regional currencies, which could temper the competitiveness of exports.
So far, asset prices are not excessive in terms of price-to-earnings ratios for stock market valuations, and earnings affordability metrics in the regional housing markets are fair, indicating that the immediate risks may be contained, provided governments pare down stimuli astutely.
The actions of policymakers will determine whether the region continues to develop at trend rate or whether asset bubbles form, and it is likely that these policymakers are already mindful of the pitfalls if they exceed the bounds of prudent fiscal and monetary easing. China has set about curbing the growth of its government deficit by reducing defence outlays. India has acknowledged the importance of accelerating privatisation of public enterprises to reverse its ballooning deficit.
In addition, both the Peoples' Bank of China (PBC) and the Reserve Bank of India (RBI) have raised the bank reserve requirements. The RBI also raised interest rates early this month , following the central banks of Australia and Malaysia, which have already raised interest rates ahead of their peers. The PBC is expected to keep a tight leash on new bank lending for most of 2010 to ensure that lending targets are met and growth of monetary aggregates is restrained.
Governments in the region also appear to be taking more specific action to contain house price inflation than in the past. New lending to Chinese government infrastructure projects has been suspended and a property tax could appear in the 2010 budget. Hong Kong has announced an increase in stamp duty on luxury residential properties and Singapore has also moved to curb property speculation.
Given the strong asset price rallies that followed the government stimulus measures there is a strong case for being wary of bubbles in Asian markets. But policymakers, acutely aware of the damage that can be caused by over-stimulating their economies, will use the many measures at their disposal to stifle the development of asset bubbles.
Rory Quinlan is head of HSBC Private Bank Ireland