China and India share a dubious honour as the global crisis wanes: They are home to two of the world's most obvious stock bubbles.
First, credit where it’s due. Both economies have done remarkably well this year, with China zooming along at 7.9 per cent and India at 6.1 per cent. Considering Japan and the US are shrinking 7.2 per cent and 3.8 per cent, respectively, we must tip our hats to officials in Beijing and New Delhi.
The same can’t be said of events in Shanghai and Mumbai, where stocks are surging, with gains of 62 per cent in Shanghai and 80 per cent in Mumbai this year.
Investors could merely be thinking long term. Asia’s two nascent superpowers are dripping with as much potential as they are ambition. And investors do need something to buy these days other than low-yielding government debt. Yet do the prospects for the Chinese and Indian economies justify such spectacular stock rallies? It’s doubtful.
Asset prices are being driven more by unusually low interest rates than economic fundamentals. It’s time for policy makers to mop up that liquidity. That includes Federal Reserve Chairman Ben Bernanke in Washington.
Australia’s October 6 move to raise rates from 3 per cent to 3.25 per cent has markets buzzing about which economy will be next. Those betting on South Korea were proven wrong on October 9 when the central bank kept rates at a record low. Attention is turning to India, where inflation is accelerating.
India’s predicament has economist Maya Bhandari of Lombard Street Research Ltd. in London calling for steps similar to those taken by former Fed Chairman Paul Volcker in the early 1980s. “India could soon need Volcker's policy,” she says.
Consumer prices paid by Indian farm workers jumped 12.89 per cent in August from a year earlier. The inflation rate for industrial workers was 11.72 per cent in the same period. Add in this year’s gain in the Bombay Stock Exchange Sensitive Index and it’s hard to argue that 3.25 per cent is an appropriate level for India’s reverse-repurchase rate.
India has too much of a good thing on its hands. Bubble troubles are cropping up in real-estate markets, too, putting central bank Governor Duvvuri Subbarao in a very difficult position. Raise rates too abruptly and the living standards of India’s 1.1 billion people take a hit. Act too timidly and Asia’s third-biggest economy overheats.
China’s balancing act is also complicated, and like India, there’s a role in it for Bernanke. Ultra-low rates are fuelling markets near and far and help explain Asia’s stock rally.
The MSCI Asia Pacific Index has climbed 70 per cent from a five-year low on March 9 as government stimulus measures and low rates filter through economies. Near-zero borrowing costs in the US and Japan are having an impact globally. All the liquidity they are creating has stock markets rising faster than economic fundamentals are improving.
It’s true that the dire predictions of a year ago didn’t pan out. China, India and Asia in general have held their ground better than many expected. That hardly seems enough for equities to be surging like it’s 1996, the year before the Asian financial crisis.
The stock party is a global phenomenon, of course. The Dow Jones Industrial Average and the Nikkei 225 Stock Average recently reached 10,000 for the first time in more than a year. That’s even though the two biggest economies are in recession and have poor employment outlooks.
It seems like the globe is experiencing a bubble in bubbles. Look no further than gold trading at more than $1,000 an ounce; 10-year Treasury yields of less than 3.5 per cent as the US amasses an unprecedented debt load; or the likelihood the yen will soon be worth more than 90 to the dollar.
With things seeming out of whack, it’s refreshing to find the occasional burst of sobriety. Take Glenn Stevens, governor of the Reserve Bank of Australia. He is spurning former Fed Chairman Alan Greenspan’s approach to interest rates in a bid to restrain runaway housing prices that could imperil the economy.
Australia’s economy is smaller and far more developed than China’s or India’s. Still, there’s something to be said of a central bank that understands the risks of ever-surging asset values. Maybe if the US had done that, its $14 trillion economy wouldn’t have crashed and infected the world.
There was a time when a central banker’s job was to take away the punchbowl just as the party got going. Now, Marc Faber, publisher of the Gloom, Boom & Doom report in Hong Kong, rarely misses a chance to blast the Fed for acting more “like a bartender” liquoring up markets than a monetary authority working to calm them. And he’s absolutely right.
Happy hour is lasting a bit too long for comfort. If stocks are rallying because of economic fundamentals, then so be it. If they are rallying because of easy-money policies, then Asia’s stability is more fiction than fact. It’s time for monetary bartenders to start declaring closing time.
William Pesek is a Bloomberg News columnist. The opinions expressed are his own.
