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Fed’s Liquidity Push Risks Dangerous Side Effects for Asia 

The Federal Reserve’s measures to revitalize the U.S. economy pose risky side effects half way across the world in Asia, warn experts, particularly in the form of asset bubbles driven by an inflow of speculative funds into the region.

Louis Vuitton at North Pavilion, Marina Bay. Further in distant is business district of Singapore.
William Cho | Flickr | Getty Images
Louis Vuitton at North Pavilion, Marina Bay. Further in distant is business district of Singapore.

Pumping cash into the U.S. financial system tends to have a spillover effect on other parts of the world and Asia, in the past, has been a big beneficiary of the extra cash looking for a home.

“The problem is that the Fed is simply not paying attention to Asia because they are so concerned about the internal economic dynamics in the U.S. and they are trying to resuscitate the U.S. labor market,” Boris Schlossberg, Managing Director, BK Asset Management told CNBC Asia’s “Squawk Box” on Friday.

“It is creating a bifurcated result where you (get) higher asset prices, but not necessarily quality growth,” he added.

The Fed announced on Thursday its third round of monetary stimulus, in which it pledged to buy mortgage related debt and other securities until the country’s labor market showed sustained improvement.

The last two rounds of quantitative easing in 2009 and 2010 resulted in massive capital inflows into the region of $66 billion and $96 billion, respectively, according to data from the Asian Development Bank (ADB), some of which was withdrawn in 2011, contributing to a subsequent slump in markets.

The ADB warned earlier this week that history could repeat itself should the region be hit by a surge in speculative fund inflows, adding that policymakers should brace for a scenario where money exits the region as quickly as they entered.

Vishnu Varathan, Market Economist at Mizuho Corporate Bank, says Asia could see an even higher level of capital inflows this time around, since the Federal Reserve is unlikely to be the only major central bank launching renewed quantitative easing - the European Central Bank, for instance, may also step in with asset purchases.

"The Fed is simply not paying attention to Asia because they are so concerned about the internal economic dynamics in the U.S." -MD, BK Asset Management , Boris Schlossberg

He says the region’s property market is most vulnerable to sharp price increases, particularly in countries such as Singapore and Hong Kong - where the seeds were sown a few years ago from previous rounds of monetary stimulus - and nascent markets like Indonesia.

And high real estate prices have been something both Singapore and Hong Kong have been keen to keep a lid on in recent years with a raft of property market measures.

Caution among investors, however, was not present in Asian markets on Friday - risk assets responded positively to the prospect of increased liquidity, with cyclical markets including South Korea and Hong Kong jumping over 2.5 percent.

Anticipation of more monetary stimulus from the U.S. has sparked gains in equity markets from New York to Tokyo. Asia stock markets have risen 4.8 percent in the last two weeks alone.

Central Banks Face New Challenge

In addition to creating asset bubbles, experts warn that the region is also vulnerable to renewed bout of inflation, as the U.S. dollar declines and commodity prices rise.

Higher commodity prices are negative for inflation conditions in many Asian economies, such as India, Thailand, Korea and Philippines, which are net importers of oil.

Vasu Menon, Vice President, Wealth Management Singapore, adds that rising prices will pose a challenge for Asian central banks going forward.

“I think central bankers are worried about inflation – the Philippines for example held its rates steady because they are concerned about inflation,” Menon said, referring to a decision by the Philippine central bank on Thursday to leave its benchmark interest rates steady at 3.75 percent.

Varathan says Asia’s central banks need to re-think how monetary policy is being conducted.

“Unconventional monetary policy in the West is shaking things up…there’s a growing sense that just relying on interest rates isn’t going to cut it,” he said.

By CNBC’s Ansuya Harjani

Contact Asia Economy


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