Asia’s Liquidity Glut


By Shu-Ching Jean Chen

Top finance officials in Asia are eager to mitigate the debilitating effects of hot money flooding to the region. Corporations are less concerned .

At a regional forum in January, Hong Kong’s financial services and treasury secretary K.C. Chan warned, “This current speculative capital that we are seeing in Asia will pose an even greater challenge to all the Asian countries” than the recent financial crisis. Rintaro Tamaki, Japan’s vice minister of finance for international affairs, added that “the most important and contentious issue” is whether the region has a robust enough crisis prevention mechanism to cope with the effects of the deluge of liquidity.

Combined with excess domestic liquidity, strong capital inflows have been stoking inflation and bolstering asset prices across Asia, prompting many countries to impose capital control measures. However, to keep their countries’ growth engines humming, most Asian governments have tried to prevent their currencies’ appreciating rapidly and have shied away from the most effective tool in combating inflation: hefty interest rate hikes. According to Michael Spencer, Deutsche Bank’s chief economist for Asia Pacific, several countries, including Singapore, Vietnam, Hong Kong, China, India, South Korea, Thailand and Indonesia, were all flirting with negative real interest rates by the end of January.

Policymakers in the region may be deeply worried, but Asian corporate leaders are only just beginning to share their concerns. In a survey released in February, the Young Presidents Organization found that CEOs in Asia, having led the world as the most confident for five out of the past six quarters, are now the second-most-optimistic, lagging behind their peers in Latin America. Even so, says Stanley Szeto, a Young Presidents Organization member and CEO of Hong Kong–based Lever Style, “people are quite optimistic because they think there won’t be a hard landing in China”.

The region’s improving financial health has a lot to do with the Asian business community’s mind-set. Flush liquidity has helped restore the financial strength of Asian companies to the pre-crisis level—even close to the 2007 peak—with sufficient funding to cover debt and cash needs in the coming year. This resurgence is being driven mainly by the ability of high-yield issuers to tap financing from banks and buoyant capital markets, according to Moody’s.

Across Asia growth is generally expected to be robust this year, despite some moderation from the stunning surge seen in 2010. But the pace will be constrained by limited spare capacity and slowing economic growth. Tom Byrne, a Hong Kong–based sovereign risk analyst at Moody’s, expects growth moderation to be most evident in China and export-dependent economies such as Japan, Korea, Taiwan, Hong Kong and Singapore, with the main risks to Asia’s economic outlook this year being inflation and slower growth in China. “In view of muted growth prospects for the advanced countries in the post-crisis era, China’s ability to maintain relatively strong growth by containing inflationary pressures will be a key factor for the regional and global economic outlook,” Byrne says.

Fitch Ratings analysts have warned that a worse-than-expected commodities inflation shock or policy missteps could lead to sharper monetary tightening and a downside risk for the region’s growth prospects. For exporters like Lever Style’s Szeto, the threat of inflation is real. A high-end textile manufacturer, Szeto is not so bothered by rising wages in China, where he runs three factories, as labor accounts for less than 20% of the production cost. But soaring raw material prices are posing a grave risk to his bottom line. “This is the biggest price inflation I’ve ever seen in the past 10 years,” Szeto says, “The price of cotton has gone through the roof.”