Oct. 11, 2010, 2:24 a.m. EDT
Asia’s problem of plenty: liquidity
Equities could be big beneficiary, but watch for ‘devastating’ effects
By V. Phani Kumar, MarketWatch
HONG KONG (MarketWatch) — The looming prospect of a fresh round of monetary easing by the West’s major central banks is likely to further expand the pool of unwanted liquidity in Asia.
Regional equities could be the big beneficiaries from the rush of money, as regulators show more tolerance of rising stock markets than they do for some other asset classes, analysts say.
But while gushing fund inflows paint a rosy market outlook for the near term, risks include inflation and a possible sudden reversal in liquidity flows, which could have “devastating consequences” for economic growth.
Currency disputes dangerous
World finance ministers say cooperation on currency disputes is critical to preventing global disputes.
“Central banks and governments [in Asia] are likely to continue trying to resist house-price appreciation, and in some instances, currency appreciation. We doubt that there will be any such intervention on equities,” said UBS strategists, led by Niall MacLeod.
The strategists cited recent monetary easing by the Bank of Japan, and expectations of a new round of quantitative easing by the Federal Reserve to recharge a slowing U.S. economy. They added that Hong Kong and India were their two most overweight markets in Asia at present.
Monday in Asia, Hong Kong’s Hang Seng Index (THE:HK:HSI) rallied 1.2%, China’s Shanghai Composite Index (SHANGHAI:CN:SHCOMP) jumped 1.9%, South Korea’s Kospi slipped 0.4% lower, Australia’s S&P/ASX 200 (AUSTRALIAN:AU:XJO) climbed 0.3%, India’s Sensex (BOMBAY:XX:SENSEX) gained 0.3%, and Singapore’s Straits Times Index advanced 0.2%. Japanese markets were closed for a holiday.
Resource-sector shares were among the biggest gainers, with Cnooc Ltd. (NYSE:CEO) (THE:HK:883) advancing 4.4%, and Aluminum Corp. of China Ltd. (NYSE:ACH) (THE:HK:2600) adding 2% in Hong Kong.
On mainland Chinese bourses, Jiangxi Copper Co. (SHANGHAI:CN:600362) (PINK:JIXAY) rose 9.3% and Yunnan Tin Co. (SHENZHEN:CN:000960) hit the daily limit of 10%.
Newcrest Mining Ltd. (PINK:NCMGY) (AUSTRALIAN:AU:NCM) rose 0.6% and Rio Tinto Ltd. (NYSE:RTP) (AUSTRALIAN:AU:RIO) added 0.7% in Sydney, while Sterlite Industries India Ltd. (NYSE:SLT) gained 2.1%.
The gains came after U.S. stocks edged higher on Friday, as much weaker-than-expected nonfarm payrolls data for September strengthened hopes the Federal Reserve will take more action to stimulate economic growth. Read the U.S. jobs report.
“The problem for governments and central banks in [Asia] is that no one really wants the money,” the UBS strategists said. “In effect, we are engaged in a gigantic game of monetary pass the parcel, with central banks printing it elsewhere in the world, to try and prevent deflation, but an unwilling recipient of that money, in Asia [excluding Japan].”
Sharp movements, or lack thereof in global currency markets, have taken center stage of late, with the International Monetary Fund on Saturday moving to referee a growing dispute over currency appreciation between nations with high trade-account surpluses and those with deficits. Read story on IMF moves to referee currency debate.
USDINR 44.1500, -0.0200, -0.0453%
Even some countries such as India, which have so far been more tolerant of a rising rupee, have recently expressed concerns about rising capital flows into the region. Reserve Bank of India Gov. Duvvuri Subbarao was quoted by Dow Jones Newswires as saying over the weekend that the central bank will intervene in the currency markets if capital inflows become “lumpy and volatile.”
“With all this liquidity around, there is a risk that it turbo-charges some markets in the region that are already displaying semi-euphoric behavior. Specifically, the Association of South-East Asian Nations markets (excluding Singapore) and India,” the UBS strategists said.
Some other analysts said risks of more policy actions by Asian governments are rising.
In emailed comments Monday, HSBC economist Frederic Neumann pointed to the risk of regulatory tightening in the region.
”The set-up for Asia is sweet, but hardly sustainable. Easy money is available in the West, and everyone wants a piece of the East. The result: Capital keeps pouring into the region,” he said.
“Whispers continue to be heard about capital controls to stem the flood pouring in the door, while local banks are told to tighten lending standards,” Neumann said.
He also said that while headline inflation in the region has slowed in recent months, the risk still remains, and there is also a risk that the huge inflows into the region could reverse.
“It was only a short two years ago, after all, when markets froze up and left locals scrambling for dollars across the globe. Lending into Asia from Western banks has soared again over the past year. This cash is especially at risk of being suddenly withdrawn,” he said.
“Local market liquidity can thus quickly dry up, with devastating consequences for economic growth,” Neumann said.