When China unleashed the largest stimulus package in its history in response to the 2008 crisis and slowing export markets in the west, it came at a price. Today China is grappling with a bill that some economists say has driven total debt to gross domestic product past 200 per cent, the Financial Times reported.
While China offers the most extreme example of using debt to fund growth, it is a pattern that has been repeated across Asia. Without exports, central banks turned on the taps, leading to a jump in household and corporate borrowing.
Now, as the US Federal Reserve considers a reversal of its ultra-loose monetary policy, the region faces a new challenge: coping with life after debt. And as investors gauge the impact of that transition, the ghosts of the 1997-98 Asian financial crisis have been reawakened.
“All this QE [quantitative easing] money has lead to a massive credit inflation bubble in Asia,” said Kevin Lai, chief regional economist at Daiwa Securities. “The crime has been committed, we just have to deal with the aftermath. During that process there will be a lot of damage . . . It’s like a margin call. Households will need to sell their assets. There will be a lot of wealth destruction.”
Echoes of the Asian financial crisis are easy enough to hear. Credit growth since 2008 has been rapid, leading to a run-up in house prices, high growth rates and corporate mega-deals. In April, Thailand recorded both its biggest ever domestic takeover and its largest equity listing, according to Dealogic data.
But as the tide of cheap money from overseas rolls back from emerging economies across the region, analysts warn that Asia could be at the start of a series of currency and credit crises, not unlike the experience of the 1990s.
Most of the focus has so far been on India and Indonesia, the two countries in Asia with the biggest current account deficits, making them the most reliant on foreign capital to make ends meet. Both have seen their currencies and their equity markets plunge in the past week.
But the risks of contagion across the region are beginning to rise, say economists, made worse by the slowdown in China, Asia’s biggest growth engine. Read more. (Subscription required.)
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