Trouble In Asia

Fed May Cause Next Crisis, Hong Kong’s Tsang Suggests (Update2)

Nov. 13 (Bloomberg) -- The Federal Reserve’s policy of keeping interest rates near zero is fueling a wave of speculative capital that may cause the next global crisis, Hong Kong’s leader said.

“I’m scared and leaders should look out,” said Donald Tsang, chief executive of the city, said in Singapore today. “America is doing exactly what Japan did last time,” he said, adding that Japan’s zero interest rate policy contributed to the 1997 Asian financial crisis and U.S. mortgage meltdown.

Fed Chairman Ben S. Bernanke, a scholar of the Great Depression, has overseen a record injection of liquidity into the world’s largest economy, pledging not to make the mistake of the 1930s, when officials tightened policy. Tsang’s warning contrasts with pledges by the Group of 20 nations that represent the world’s biggest economies to keep stimulus measures in place.

“We have a U.S. dollar carry trade at the moment,” Tsang, 65, said in a speech where leaders of the Asia Pacific Economic Cooperation forum are gathering for a weekend summit. The carry trade is where investors borrow cheaply in one currency and use the funds to invest in other currencies.

Where is the money going -- it’s where the problem’s going to be: Asia,” Tsang said. “You can see asset prices going up, not only in Korea, in Taiwan, in Singapore and in Hong Kong, going up to levels that are incompatible or inconsistent with the economic fundamentals.”

Past Experience

Tsang was Hong Kong’s financial secretary during the 1997- 98 Asian crisis, when countries from South Korea to Indonesia were forced to borrow from the International Monetary Fund because of an investor exodus sparked by concerns officials couldn’t maintain the value of their currencies. Together with Hong Kong Monetary Authority chief Joseph Yam, he intervened to buy $15 billion of Hong Kong stock, successfully defending the territory’s exchange-rate peg to the dollar.

Hong Kong’s interest rates track those of the U.S. because of the currency’s peg to the dollar, which means that foreign capital flows into stocks and property. Real estate prices in the city have risen more than 25 percent this year, prompting the International Monetary Fund to warn this month of a possible bubble. Hong Kong Financial Secretary John Tsang said Nov. 4 the government was “very concerned” about the rise.

Some academics and economists say Asian policy makers should do more to stave off asset bubbles.

‘Serious Risk’

“Asia’s bubbles now pose a serious risk to financial stability,” said Barry Eichengreen, professor of economics at the University of California, Berkeley in an article published today on This is “a task for emerging market central banks, not for the Fed or the European Central Bank.”

Tsang’s warning may nevertheless strike a chord elsewhere in Asia, where inflows of capital threaten to create bubbles.
World Bank President Robert Zoellick, also in Singapore for APEC, said that while Asian countries do face some risk of asset prices climbing, it’s up to the region’s officials to act.

“Given liquidity in the international marketplace and given the pace of recovery in East Asia, you could start to see some asset bubbles,” Zoellick said in a Bloomberg Television interview yesterday. “There will be a need here, unlike you might have in Europe and North America” to look at actions such as Australia’s rate boost this month, he said.


I too, worry about the next crisis. Where its epicenter will be is a matter for debate. China is a one possibility, another is Eastern Europe. Notice that the Ukraine had its credit rating downgraded again while suffering from a bad case of H1N1 that may further compound productivity problems.