The massive flows of money unleashed by U.S. monetary policies are raising alarm in Asia over a potential "tsunami" of turmoil in markets struggling to absorb so much liquidity.
Hong Kong's chief executive, Donald Tsang, said Friday that he was concerned over the Federal Reserve's decision last week to buy $600 billion in U.S. debt, seeking to encourage more borrowing and spending through a policy known as quantative easing.
The resulting lower interest rates and weaker U.S. dollar raise the likelihood that much of that money will flood into emerging markets, especially in Asia, as investors seek higher returns, increasing market volatility, said Tsang and others attending a business conference on the sidelines of a Pacific Rim economic forum.
The Federal Reserve's move has cast into sharp contrast the conflicting strategies of different economies as they navigate their way through difficult recoveries from the global financial crisis.
The differences have soured talks this week in Seoul, South Korea, between leaders of the world's 20 biggest economies, with some, including China, Brazil, Germany and South Africa, accusing the U.S. of deliberately undervaluing its currency to gain a trade advantage — the same charge Washington has long leveled at Beijing.
"I'm pretty much concerned about impact of the U.S. second round of quantitative easing on Asian economies," Tsang, whose territory is one of the world's most open economies, told a summit of top executives on the sidelines of the annual summit of the Asian-Pacific Economic Cooperation forum. "We may be out of the eye of the storm, but we certainly still remain in a danger zone."
While the U.S. continues to rely on loose monetary policy and stimulus, Asian economies that weathered the economic slump with relatively less trauma are tightening credit as they seek to cool overheating investment and markets.
"International investors should tighten their seat belts and get prepared for unprecedented turbulence in currency markets, bond markets, stock markets and the property market," said Tsang.
"The next wave will hit at the corporate level through massive volatility in the currency and securities markets," he said. "Suddenly you can see a tsunami starting."
Differences over monetary policy and currency rates also are raising worries over a potential resurrection of trade barriers that could set back progress on liberalization and push the global economy back into recession.
New Zealand's Prime Minister John Key urged countries to demonstrate "patience and fairness" in adjusting exchange rates.
"If we don't get this right, it is my view that we'll see currency wars," Key told participants at the CEO summit. "We'll see retaliatory action taken that would be bad for the economic growth, that would have unintended consequences, and it would be bad for integration in the region."
It also raises the likelihood of scarce capital chasing speculative investments instead of those that might help create jobs and nurture long-term growth.
"Money will go where the returns are the highest, but the highest are not necessarily the best," said Shengman Zhang, chairman for the Asia Pacific for Citi.
Despite the risks, some view the U.S. imperative to keep its recovery on track as the more crucial priority.
"Should developed countries tighten their monetary policies to prevent flows to emerging countries? I would say probably not. That may risk a double dip recession which we have so far successfully avoided," said Junichi Ujiie, chairman of Nomura Securities, Japan's biggest brokerage.
"That would cause more problems for the developing countries than appreciation of their currencies," Ujiie said.
The difficulties in handling excess flows of speculative investments reinforce the urgency of financial reforms to make markets in emerging economies bigger, more sophisticated and more resilient, those speaking at Friday's conference said.
"Many emerging countries are discussing those overheating problems. How to strengthen the financial sector will be the key to preventing financial crises," said Jong-Wha Lee, an economist at Korea University.
In Hong Kong's case, Tsang said the territory of 7 million, which depends heavily on trade with China but whose currency is pegged to the U.S. dollar, would not shy away from "anti-speculative moves."
"The global financial crisis has exposed some raw nerves of globalization, and the vulnerability of our system in the 21st century," he said.
AP Business writer Tomoko A. Hosaka contributed to this report.
- interest rates
- quantative easing
- emerging markets
- developed countries
- South Africa
- Donald Tsang
- monetary policy
- Hong Kong
- global financial crisis