There They Go Again: Asia Central Bank Policies Spur Bubbles

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Recent years have seen reams of research on the role of central banks in inflating asset-price bubbles. The latest developments in Asia suggest that more may be coming.

With interest-rate cuts in New Zealand and South Korea, and the potential for more easing in Australia and China, policy makers are fanning the risk of bubbles a decade after their U.S. counterparts oversaw a record mortgage boom.

The central bank of New Zealand Thursday lowered interest rates even in the face of a booming property market in the nation’s largest city. South Korea followed suit, potentially encouraging gains in household debt levels that are already at a record. The Reserve Bank of Australia governor Wednesday said he may lower rates again, even as he wrung his hands over what he dubbed as “crazy” Sydney house prices.

Then there’s China, ground zero for the mother of all stock-market surges. The market capitalization of Chinese shares has climbed $6.5 trillion in the past year as policy makers returned to stimulus mode.

Policy actions show that, for all the recognition of the dangers of excess liquidity for particular asset sectors, central banks are still left with little choice when growth is deteriorating and job markets weakening. The risk is they’ll have clean-up jobs later should prices tumble.

Little Option

“Asian central bankers are between a rock and a hard-place -- easing further risks stoking bubbles, but sitting on your hands isn’t an option either,” said Frederic Neumann, co-head of Asian economic research at HSBC Holdings Plc in Hong Kong.

In China, central bank Governor Zhou Xiaochuan has lauded the stock market as providing a forum for companies to raise financing. While monthly data for May on Thursday offered optimism the nation’s slowdown may be bottoming, with growth tracking less than 7 percent the People’s Bank of China will be taking more action, according to banks including Goldman Sachs Group Inc.

“We believe policy makers will retain a clear loosening bias,” Goldman economists including Beijing-based Yu Song wrote in a note. The next major move would probably be a reduction in required reserve ratios for banks, as soon as this month, they wrote.

PBOC Outlook

Besides such broad measures to spur liquidity, the PBOC has deployed facilities that offer lenders funds in return for collateral. Officials may focus most of their additional action on such programs, which amount to targeted measures to support specific areas of the economy, such as infrastructure investment, according to JPMorgan Chase & Co.

China’s weakness has played a role in deteriorating growth across the region, supplementing local dynamics. In South Korea, one unexpected domestic headwind is the spread of Middle East respiratory syndrome, or MERS, which could rattle consumer confidence.

The Bank of Korea lowered its key interest rate to an unprecedented low of 1.5 percent, over the opposition of one of its board members. BOK Governor Lee Ju Yeol acknowledged the move could boost household debt. South Korea knows the cost of excess consumer borrowing, after a credit-card crisis in 2003, when economic growth more than halved.

No Obstacle

“It seems that the household debt is not a major obstacle to further monetary easing,” Australia & New Zealand Banking Group Ltd.’s Raymond Yeung and Louis Lam wrote in a note.

In New Zealand, central bank chief Graeme Wheeler lowered rates for the first time in four years as slower growth and falling dairy prices overrode concerns about the real-estate market. House prices in Auckland surged 16 percent in May from a year earlier, the fastest increase in 11 years, property research firm Quotable Value New Zealand said Tuesday.

The other side of the Tasman Sea, neighbor Australia has had a similar challenge. The Reserve Bank cut rates in February and again in May to a record-low 2 percent, doing little to slow a boom in Sydney housing. Australia’s biggest city, where prices rose 15 percent in May from a year earlier, is in the grip of a bubble, Treasury Secretary John Fraser said June 1.

“The longer these bubbles are allowed to build, the more the risks increase,” said Gareth Leather at Capital Economics Ltd. in London, who has covered Asian economies for almost a decade. “It’s not just housing where there have been bubbles. Credit growth has shot up across large parts of Asia since the financial crisis.”

Regulatory Tools

Some authorities are applying macroprudential tools and measures such as stricter collateral requirements, higher taxes on foreign buyers and tougher lending criteria to try and cool demand.

Hong Kong’s central bank in February rolled out measures to cool the property market and protect financial stability after house prices more than doubled since 2009, spurred by record-low mortgage rates and money flowing in from China.

“Such targeted macroprudential measures could be used by other central banks,” said Rajiv Biswas, Asia-Pacific chief economist in Singapore at IHS Global Insight.

New Zealand last month brought in measures including a push to enforce taxation of capital gains on investment properties. And the central bank said it will require investors to have a 30 percent down payment to get a mortgage on Auckland property. Australia’s prudential regulator in December called on banks to limit growth in home lending to investors to 10 percent a year.

China Relaxing

In China, authorities have moved in the other direction, deciding to relax previous restrictions imposed on property loans when authorities were trying to contain prices.

Trying to address slow growth and asset bubbles isn’t unique to Asia. Authorities in Scandinavia are confronting red-hot housing markets even as their economies struggle to gain traction after policy stimulus.

Back in Asia, the diminished demand from China -- imports tumbled 18 percent in May from a year before -- means growth pressures are set to confront policy makers for some time.

“A fine balance needs to be struck,” said Neumann of HSBC. “Easing just enough to keep growth up while not blowing ever-larger bubbles. It’s an almost impossible balance to strike.”

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