Asian asset bubbles defy higher rates

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 destabilising positions,'' says Bill Belchere, Asian economist at Macquarie Securities 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.

"There is too much money globally chasing meagre 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.

Not only did last year's higher interest rates fail to curb over investment, they may even have helped draw in all that cash. The People's Bank of China raised its benchmark rate twice last year; while higher rates kept consumer prices contained, they encouraged even more investment and growth by offering enhanced returns.

China's M2, the broadest measure of money supply, rose 16.9 per cent to 34.6 trillion yuan ($4.46 trillion) in December, the highest since figures became available in June 1998. In Thailand, M2 in November reached a record 6.92 trillion baht ($197 billion).

"The influx is not going away in the near future," says Masahiro Kawai, dean of the Asian Development Bank Institute in Tokyo. "Raising interest rates won't work, and they will just attract more money."

While South Korea's central bank increased rates three times in 2006, Seoul's real-estate boom has continued unabated, jeopardising President Roh Moo Hyun's pledge to make housing more affordable.

That's forcing the implementation of measures such as home-price caps, stricter borrower screening and curbs on the number of loans a person can take out. Central bank Governor Lee Seong Tae warns that household debt threatens the nation's longest economic expansion in a decade.

Reserve Bank of India on January 31 raised its overnight rate for the fifth time in a year and said an explosion of credit remains "a matter of concern."Governor Yaga Venugopal Reddy announced curbs on lending, telling banks to double provisions for real estate, personal loans, credit cards and loans against shares.

China's rate increases last year failed to cool an investment boom that stoked the fastest growth since 1995. The central bank also increased the amounts banks have to set aside as reserves four times since June to discourage excessive lending.

That helped slow money supply growth to 16.9 per cent in December from 19.2 per cent in January 2006.