Reply #26: Asian Asset Bubbles Defy Higher Rates; Nations Try Other Tools [View All]

[54anickel]

http://www.bloomberg.com/apps/news?pid=20601089&sid=ajbIBdY0Pf7E&refer=china

Feb. 5 (Bloomberg) -- Raising interest rates didn't work.

So now Asia's central bankers and governments are trying curbs on bank lending, construction fees, even environmental regulations in an effort to combat asset bubbles that have made Seoul the world's second-priciest city and Mumbai apartments cost as much as Manhattan's.

The measures aim to control lending and stem a gusher of money from overseas lured by the more than 25 Asian interest- rate increases last year. The risk is that the new measures, easily circumvented and effective only for limited duration, may work no better at deflating bubbles before they burst and prices tumble, potentially shaking global markets.

``It doesn't take a lot of capital inflows to create very bubbly positions, inflationary positions, financially destabilizing positions,'' says Bill Belchere, Asian economist at Macquarie Securities Ltd. in Hong Kong. Policy makers, he says, are ``a bit confused about how to handle this.''

Developing countries in Asia attracted $98 billion in overseas investment last year, according to United Nations statistics, about four times the average from 1998 to 2004. Investment in emerging markets in other regions declined last year, the UN figures show.

No `Perfect' Solution

``There is too much money globally chasing meager returns, and the liquidity has found its way to asset markets,'' says Arjuna Mahendran, chief Asia strategist at Credit Suisse Group in Singapore. ``There is no perfect solution. If the flows aren't absorbed, you'll have a crisis at some stage.''

A bust would be ``highly disruptive to the Asian economies themselves, and also very unpleasant for investors who have been chasing returns in Asia,'' says Donald Straszheim, vice chairman of Roth Capital Partners in Newport Beach, California.

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``Asian governments must liberalize their economies to allow consumers and investors to do their thing,'' says Macquarie's Belchere. ``Because governments aren't doing that, it pushes central banks into a corner. They have to do something to absorb all that liquidity, all those inflows, or they risk a massive inflationary breakout.''


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