Asians Gird for Bubble Threat, Criticize Fed Move

Bloomberg
Asians Gird for Bubble Threat, Criticize Fed Move
November 04, 2010, 6:08 AM EDT

By Michael Heath

(Updates with comments from Malaysia central bank starting in second paragraph.)

Nov. 4 (Bloomberg) -- Asia-Pacific officials are preparing for stronger currencies and asset-price inflation as they blamed the U.S. Federal Reserve’s expanded monetary stimulus for threatening to escalate an inflow of capital into the region.

Chinese central bank adviser Xia Bin said Fed quantitative easing is “uncontrolled” money printing, and Japan’s Prime Minister Naoto Kan cited the U.S. pursuing a “weak-dollar policy.” The Hong Kong Monetary Authority warned the city’s property prices could surge and Malaysia’s central bank chief said nations are prepared to act jointly on capital flows.

“Extra liquidity due to quantitative easing will spill into Asian markets,” said Patrick Bennett, a Hong Kong-based strategist at Standard Bank Group Ltd. “It will put increased pressure on all currencies to appreciate, the yuan in particular has been appreciating at a slower rate than others.”

The International Monetary Fund last month urged Asia- Pacific nations to withdraw policy stimulus to head off asset- price pressures, as their world-leading economies draw capital because of low interest rates in the U.S. and other advanced countries. Today’s reactions of regional policy makers reflect the international ramifications of the Fed’s decision yesterday to inject $600 billion into the U.S. economy.

Stocks Climb

Most Asian currencies rose against the dollar after the Fed’s move, led by a 0.5 percent climb in the Taiwanese dollar and 0.2 percent gain in the South Korean won. New Zealand’s currency reached a 29-month high, and Australia’s dollar touched its strongest level since 1982. The MSCI Asia Pacific index of stocks advanced to the highest level since July 2008.

People’s Bank of China adviser Xia said U.S. policy makers have a conflict between making policy for the domestic economy and accepting responsibilities that come with being the issuer of the international reserve currency, writing in the Finance News newspaper today.

China should counter the U.S. through regional currency alliances, speeding international use of the yuan and seeking stability in exchange rates through the Group of 20, which holds a summit next week, Xia later told reporters in Beijing.

China Policy

“We may need to moderately tighten monetary policy and should tighten controls on banks’ lending,” He Fan, an economist at the Chinese Academy of Social Sciences, said in an interview in Beijing. “We are worried about asset bubbles in China and the Fed’s new quantitative easing measures will add to the pressure on prices.”

China raised interest rates for the first time since 2007 last month, and has limited the yuan to less than a 2 percent gain versus the dollar since June.

Asian currencies have climbed against the dollar this year as the region’s growth outpaces the rest of the world. Regional central banks from China to India and Australia have raised interest rates to curb inflation pressure, while countries including South Korea and Indonesia have adopted measures to slow the flow of speculative money.

“Our country will actively consider implementing capital control measures to improve the macro-economy,” Kim Ik Joo, a director general of South Korea’s finance ministry, said in a telephone interview today. “Now that the U.S. has announced its plans on quantitative easing, don’t you think there will be an influx of capital going into emerging markets?”

Goldman’s Call

Goldman Sachs Group Inc. this week raised its 12-month target for Hong Kong’s Hang Seng Index of equities, saying the city has the most to gain from extra liquidity released by quantitative easing programs and China’s growth.

The Fed’s move will “definitely add pressure to the asset markets in emerging-market economies,” HKMA chief Norman Chan said at a press briefing in Hong Kong today. The HKMA will “take measures that are specific to the housing market if necessary.”

In contrast, the Philippines central bank said global financial markets will be calmer and the decline of the U.S. dollar will ease after the Fed purchase plan came “in line” with forecasts. Funds may continue to flow to emerging markets because of low U.S. yields, Bangko Sentral ng Pilipinas Governor Amando Tetangco said in a mobile phone text message.

Thai Finance Minister Korn Chatikavanij said central banks in the region are in touch and if needed may act jointly against currency speculators, speaking to reporters in Bangkok. Bank Negara Malaysia Governor Zeti Akhtar Aziz said in an e-mailed statement that “central banks in the region also have sufficient range of instruments to manage this challenge and are willing to act collectively if the need arises to ensure stability.”

Currency Pool

The Association of Southeast Asian Nations, together with Japan, China, and South Korea, last year signed an agreement to create a $120 billion foreign-currency reserve pool. Member nations are able to tap the pool, set up in a framework of bilateral currency swaps, in times of turmoil to defend their exchange rates.

Sri Lanka aims to keep rupee gains “controlled” as the Fed’s action generates an “enormous” amount of credit, the nation’s central bank Governor Ajith Nivard Cabraal said in an interview during an Asian Development Bank forum in Manila today.

Currency policies by Asian central banks have differed in recent months. While Thailand, Japan and South Korea have taken steps to cool an appreciation in their currencies that is threatening exports, Singapore has signaled it will allow faster exchange-rate gains.

‘Two Giants’

New Zealand Finance Minister Bill English said that U.S. and Chinese policies are causing his nation’s currency to soar, endangering export competitiveness.

“We’re caught between the policies of the two giants, both of which puts some pressure on us, with the U.S. depreciating their currency and China not allowing theirs to appreciate as much as would suit us,” English said in a Bloomberg Television interview in Tokyo.

Meantime in Japan, whose currency has risen to the highest level in 15 years versus the dollar, Prime Minister Kan said at parliament today that the strong-yen trend is partly related to “the U.S.’s weak-dollar policy, which prompted the rise of the currencies of many emerging nations.”

U.S. dollar policy is set by the Treasury Department, and Secretary Timothy F. Geithner last month reiterated the long- standing American stance that his nation supports “a strong dollar.”

--With assistance from Belinda Cao and Eva Woo in Beijing, Frances Yoon in Seoul, Tracy Withers in Wellington, Max Estayo in Manila, Suttinee Yuvejwattana in Bangkok, Takashi Hirokawa and Sachiko Sakamaki in Tokyo and Sonja Cheung, Marco Lui and Stephanie Tong in Hong Kong. Editors: Chris Anstey, Lily Nonomiya


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