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Is there an Asian bubble and are fears that it will
burst justified?
Asian markets led the recovery out of the global financial
crisis. They were in a far stronger position than developed
markets, which were only just beginning the painful process of
deleveraging.
Strong performance
By the end of 2010, according to Bloomberg, in sterling terms
the FTSE All World Asia Pacific ex Japan Index had risen 114% from
the low of March 2009. It outperformed both the FTSE 100 and the
S&P 500, which registered gains of 67% and 66.6%,
respectively.
Governments, corporates and consumers within the region were not
overleveraged; Asia had experienced its own financial crisis in the
late 1990s and was therefore in a much better position to weather
the storm. Current account surpluses enabled governments across
Asia to increase spending. Notably, China spent billions on
improving its infrastructure.
The question now being asked is whether Asia has created a
bubble. This is of concern, as bubbles tend to burst rather than
deflate slowly. But all the signs show that China's economy is
deflating, so this shouldn't be a worry.
Chinese deflation
Inflation in China has been a major issue, as food and fuel in
developing markets are a much larger proportion of the average
family's shopping basket. Food prices have been responsible for
approximately 70% of the increase in China's Consumer Prices
Index with short-term factors, such as natural disasters and
disease, being the main contributors to the rise in food
prices.
The likelihood is that inflation has peaked. Much of the
tightening has been directed towards the property sector, so
residential price growth has slowed considerably, especially in the
first-tier cities, which experienced the fastest growth. Wage
growth is now outpacing property price rises and should eventually
make properties more affordable. In addition the authorities have
launched a low-cost housing project to build ten million homes in
2011.
Non-performing loans are on the increase but, if in the future
the banks look vulnerable, the authorities are likely to step in
and help the financial sector as they have done in the past.
Slowdown inevitable
It is important to remember that China is a command economy,
which can quickly switch its policy stance and ease restrictions.
Urbanisation will continue to be a major driver of economic growth
for the foreseeable future. But, at some point, China will go
through a painful contraction process – although this is
unlikely to be imminent.
Even though economic growth across Asia is expected to outpace
the pedestrian levels forecast for the developed world, if another
global financial crisis were to occur the emerging markets would
not escape unscathed. Instead, a flight to liquidity (the sale of
less liquid or more risky investments) is likely, as in 2009,
offering investors a prime opportunity to buy Asian equities.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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