Concerns about Asset Bubbles

There has been a raising concern about the asset bubbles in Asia popping once the Fed raise their interest rates.


The common trend here is that the Asia markets and economies are recovering faster than the United State's and apparently people are borrowing money from the United States banks at a low interest rate to invest in Asia.

With regards to the rise in investments, we see a rise in the stock prices, commodities, and currencies. The Austrailian dollar is up 35% and still rising. We see other markets like South Korea, Singapore and Hong Kong all flourishing under the investments made by the Americans.


The concern here is that when the Fed raises their interest rates, the number of investments in Asia will plummet all of a sudden, bringing the stock prices, commodities and currencies back to an all-time low. A sudden withdrawal might stabbed Asia hard in the back and we will be back to Square 1 all over again.


Stopping investments or limiting the number of investors is not a panacea to the perplexing problem. This will just deter potential investors and it will be disadvantageous to Asia in the long run, especially, when we are feeding off the energy of the world to grow rapidly right now.


A more relevant and congenial solution will be to ensure sustainability in these investments, which is to say, the investors will not leave even after the Fed raises their interest rates. Typically, when the Fed raises their interest rates, the investors will sell their businesses and take away with them whatever profits they made and stay low for a while until they find another opportunity.

Hence, the key here is to make sure that they stay and develop their business conscientiously even with the rising interest rates.


There are two ways of doing things,

FIRST:  Help them to cope with the rising interest rates which is forecasted to start by the end of mid 2010. This can be done by drafting out policies esoteric to the individual country's strength. For instance, Singapore can promise low trade tax, Hong Kong can adjust their real estate policies and infrastructure rent. By lowering the cost to do business here in Asia, they will still stay even if the interest rates rise because the total cost will still be manageable.

SECOND: The government must have some backup plans to cushion the backdrop if the companies are really going to leave when the interest rates are raised by the Feds. They have to make sure that the stock prices and currency rates will not fall tremendously. It is perfectly fine for it to fall by a small bit because it will pick itself up easily after a few months. However, if consumer confidence is heavily dented, it is very hard to regain their confidence in the market.


It is really a conundrum, nonetheless, the government really has to start planning now or else it will be too late when the bubble burst again.

Credits -marketwatch, -lh5, -mytravelmaps