Recently a number of economists have argued that due to Asia’s quasi-pegged currencies, easy monetary policies, and high savings rates (which drive investment and thus maintain a wide output gap at the same time as they generate high growth) , the region can see strong asset price appreciation (perhaps even a bubble). Furthermore, nothing can (or will) be done to stop it due to the economic and political importance of the export sector.
In other words, for fear of having to move the currency, monetary policies will not be adjusted enough to compensate for underlying economic strength. Sterilizing the excess liquidity that arises from exchange rate intervention will also be insufficient unless it pushes up interest rates – and this would merely expand the interest differential and cause further hot money inflows. I have also seen similar arguments made for Emerging Markets as a whole and for China specifically.
I also recently had a chance to see a number of global macro/asset allocation type of presentations, and they were all basically saying that you had to buy Emerging Markets now because the developed markets were toast. Apart from the liquidity argument, the persistent growth differential also figured prominently. Now in principle I don’t disagree that EM economies are “better” than DM economies in so many ways – they are surplus economies, with a better growth outlook, stronger fiscal positions, less of a debt overhang – all of that. But the “buy emerging markets while you still can” tone was a little frenzied.
I have also thought for some time that central banks and other financial policymakers have recently expressed an increased willingness to try their hand at pricking asset bubbles relative to past cycles. After all, focussing doggedly on CPI can get pretty dull after a while – its just all too mechanical for these “masters of the universe”. China’s policymakers are old hands at micro-economic policy adjustments and have often used these in lieu of interest rates or other more monetary policies. Following everything the Fed and the ECB have done to try to mitigate the effects of our most recent credit bust, perhaps other central banks will get more imaginative with their measures than past experience indicates?
It was in this context that I found myself fascinated by the recent news that Brazil now plans to impose taxes on foreign purchases of equities to avoid “excess speculation in … capital markets”. I am not saying that anything like this is necessarily going to happen in, say, China (and certainly not in HK). But it is true that financial policymakers watch what others in similar predicaments are doing and have been known to borrow ideas now and then ….
