Growing US$ carry trade could fuel new speculative mania: Tsang
By CHEW XIANG 14 November 2009
A carry trade that is building up in the US dollar could fuel a new wave of speculative mania, Hong Kong Chief Executive Donald Tsang said yesterday.
‘We have a US dollar carry trade at the moment. America is doing exactly what Japan did the last time,’ he told business leaders on the first day of the Apec CEO summit in Singapore.
In recent years, Japan’s low interest rate policy - instituted to refloat its economy - instead made the yen a favourite for the carry trade (borrowing in one currency to invest in another).
That led to asset price inflation, contributing to the Asian financial crisis and the US mortgage crisis, Mr. Tsang said. ‘I’m scared, and leaders should look out and watch out’ for asset bubbles in Asia, he said. ‘The process of recovery in the world is still incomplete.’
At an earlier session at the same event, World Bank president Robert Zoellick said monetary policies in Asia have to be handled with care to avert inflation.
‘With this liquidity, we could see inflation or some flow into commodities markets or certain asset price markets,’ he said. ‘We are at the stage of recovery where confidence is very important, and an asset bubble (bursting) would hurt that.
‘That could, in turn, undermine confidence in 2010 - which is the year I’m more concerned about.’
Mr. Zoellick said the currency issue had a deeper structural dimension and required a rebalancing of the world economy to solve.
One issue is the exceptionally high savings rate in China, which Mr. Zoellick attributed to very high retained earnings by state- owned enterprises. China is the United States’ biggest creditor and has been criticised for keeping the Chinese yuan artificially high.
Mr. Zoellick said China’s state- owned companies could pay out more in dividends or the government could open up the economy to foreign companies, increase competition to create more jobs and generate more consumption.
He said developing countries need to build up local currency bond markets, noting that those that did so benefited in the recent crisis. He agreed that there was concern about the weakening US dollar, but said it was a freely traded currency. ‘Part of it is also how other countries deal with their currencies,’ he said.
For its part, the US, as well as other developed countries, will spend some time on the sidelines restructuring their economies and cannot do much to boost global growth, he said, noting that the sombre mood at the recent G-20 meeting in Scotland was very different from the sense of pragmatism in Asia.
Large-scale unemployment, possible loan delinquencies and other ‘second wave’ effects will further hamper recovery, Mr. Zoellick said.
‘Protectionism is another major risk. By and large, now it is a low-rate fever, it is not yet a full-blown influenza. But if you have large-scale unemployment, political leaders might be under pressure to do something,’ he said.
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Growing US$ carry trade could fuel new speculative mania: Tsang
By CHEW XIANG
14 November 2009
A carry trade that is building up in the US dollar could fuel a new wave of speculative mania, Hong Kong Chief Executive Donald Tsang said yesterday.
‘We have a US dollar carry trade at the moment. America is doing exactly what Japan did the last time,’ he told business leaders on the first day of the Apec CEO summit in Singapore.
In recent years, Japan’s low interest rate policy - instituted to refloat its economy - instead made the yen a favourite for the carry trade (borrowing in one currency to invest in another).
That led to asset price inflation, contributing to the Asian financial crisis and the US mortgage crisis, Mr. Tsang said. ‘I’m scared, and leaders should look out and watch out’ for asset bubbles in Asia, he said. ‘The process of recovery in the world is still incomplete.’
At an earlier session at the same event, World Bank president Robert Zoellick said monetary policies in Asia have to be handled with care to avert inflation.
‘With this liquidity, we could see inflation or some flow into commodities markets or certain asset price markets,’ he said. ‘We are at the stage of recovery where confidence is very important, and an asset bubble (bursting) would hurt that.
‘That could, in turn, undermine confidence in 2010 - which is the year I’m more concerned about.’
Mr. Zoellick said the currency issue had a deeper structural dimension and required a rebalancing of the world economy to solve.
One issue is the exceptionally high savings rate in China, which Mr. Zoellick attributed to very high retained earnings by state- owned enterprises. China is the United States’ biggest creditor and has been criticised for keeping the Chinese yuan artificially high.
Mr. Zoellick said China’s state- owned companies could pay out more in dividends or the government could open up the economy to foreign companies, increase competition to create more jobs and generate more consumption.
He said developing countries need to build up local currency bond markets, noting that those that did so benefited in the recent crisis. He agreed that there was concern about the weakening US dollar, but said it was a freely traded currency. ‘Part of it is also how other countries deal with their currencies,’ he said.
For its part, the US, as well as other developed countries, will spend some time on the sidelines restructuring their economies and cannot do much to boost global growth, he said, noting that the sombre mood at the recent G-20 meeting in Scotland was very different from the sense of pragmatism in Asia.
Large-scale unemployment, possible loan delinquencies and other ‘second wave’ effects will further hamper recovery, Mr. Zoellick said.
‘Protectionism is another major risk. By and large, now it is a low-rate fever, it is not yet a full-blown influenza. But if you have large-scale unemployment, political leaders might be under pressure to do something,’ he said.
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