Less than 10 months ago, the great fear in Asia was that the region would suffer through the overwhelming wealth destruction that was already taking place in the U.S. as a result of the financial crisis. Stock markets tumbled as exports plunged and economic growth deteriorated. Lofty property prices in China and elsewhere looked set to bust as credit tightened and buyers evaporated. Asia’s markets were on the verge of a panic.
But now, with surprising speed, fear in Asia is swinging back to greed as the region shows signs of recovery — and some economists are warning that asset-price bubbles that had been popped by the global recession may be reinflating. Property and stock markets are soaring in many parts of Asia. For example, the main index of the Shanghai stock market has surged more than 80% this year, while Indonesian stocks are up 57%. Although U.S. stocks have rallied off their March lows, the S&P 500 is still up less than 6% since Jan. 1.
It feels a bit curmudgeonly to suggest that these happy Asian trends should be greeted with skepticism. Higher asset prices mean households feel wealthier and better able to spend, which could further fuel the region’s nascent economic rebound. But there’s risk that financial conditions now in place could lead to excessive or speculative increases in prices. If true, Asia could soon find itself saddled with overheated markets similar to the U.S. housing market of a few years ago — and on the brink, once again, of a crash. “The seeds are being sown for Asia’s next bubble,” HSBC economist Frederic Neumann argued in a recent report. “The world has not changed, it just moved places.”
The incipient bubble — or, possibly, bubbles — is being created by government policy. In response to the widening global credit crunch of 2008, policymakers from New Delhi to Tokyo slashed interest rates and flooded financial sectors with cash in frantic attempts to keep loans flowing and economies growing. These steps were perfectly logical for central bankers striving to reverse a deepening, and frightening, economic crisis. But there’s increasing evidence that too much money is now sloshing around. This easy money might be winding up in stock and real estate markets, pushing prices up too far and too fast for the underlying economic fundamentals.
Much of the concern is focused on China, where government stimulus efforts have been large and effective. Money in China has been especially easy to find. Aggregate new bank lending surged 201% in the first half of 2009 from the same period a year earlier, to nearly $1.1 trillion. Meanwhile, exuberance over a quick recovery — which was given a further boost by surprisingly strong 7.9% GDP growth in the second quarter — has buoyed investor sentiment.
This combination of factors is reflected not just in soaring stocks. Property prices in China’s major cities, after a period of weakness, are rising again, helped along by government incentives such as tax breaks on property transactions. According to government data, new home prices in 36 Chinese cities rose 6.3% in June from a year earlier — before the worst of China’s downturn set in. Anecdotally, the property sector is showing the signs of frothy enthusiasm symbolic of the onset of bubbles. In Nanjing in mid-July, 3,000 people snapped up tickets for the right to purchase apartments in a new development with only 600 units. Within one hour of the opening of sales, buyers had already reserved about 100 of them for purchase.
Exuberance can be contagious. China State Construction Engineering, the country’s largest home developer, said this month it plans to raise as much as $7.3 billion in an initial public stock offering in Shanghai, which would be the world’s biggest IPO in more than a year. Demand for shares will likely exceed supply. Several smaller IPOs in China this year have been heavily oversubscribed by investors whose appetite for punting has suddenly returned. “We’re not in a full-blown bubble yet,” says David Cui, China strategist for Merrill Lynch in Shanghai. “But the risk is there. There is such a sharp turnaround, especially since it is largely fueled by easy money.”
Similar circumstances are evident elsewhere in Asia. In Singapore, property prices are rising despite the city-state’s sharp recession. While GDP in the second quarter likely contracted by 3.7% from a year earlier, the resale index for Housing and Development Board apartments, a key indicator of local property market conditions, rose an annualized 5% in the second quarter to an all-time high. In Hong Kong, a city famous for its property booms and busts, prices have rebounded from last year’s slump and were on course to retake their highs set in mid-2008, according to HSBC.
Policymakers may be starting to worry that asset prices are running up too quickly. China’s central bank, for example, sold bills in July at the highest interest rate this year, a signal that the government could begin restricting credit. But many economists believe that policymakers will not aggressively rein in monetary policy and stimulus measures, out of fear of squashing Asia’s nascent recovery while the global economy remains weak. “There is close to a zero possibility that the Chinese government will do anything this year that constitutes tightening,” says Andy Rothman, Shanghai-based economist for brokerage CLSA. “The recovery is only in its early stages.”
Still, some analysts see excessive exuberance not in stock and property markets, but among the economists predicting bubbles. Rothman believes that prices in China are an early stage of recovery and are not close to dangerous heights. Despite the big run-up in the Shanghai stock market, he points out, the index is still half the level reached in the last peak in late 2007. “We’re seeing the early stages of asset-price inflation in China,” Rothman says. “It is far too premature to be talking about a bubble.”
Without a major shift in government policy on the horizon, the the easy money conditions will stay in place, making bubbles more likely. “We believe a bubble is inevitable and will only grow bigger,” stated investment bank Nomura of China’s property market in a recent report. In a global economy that has produced more dramatic ups and downs than anyone thought possible over the past two years, Asia may be heading for another plunge.
— With reporting by Jessie Jiang / Beijing
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