ST : 'Beware of asset price inflation'

Apr 9, 2010

'Beware of asset price inflation'

Stanchart banker flags risk for markets with high capital inflow

By Gabriel Chen

ASSET price inflation could become a key problem for emerging economies
buoyed by capital infusions from developed countries, warned a top banker at
a seminar here yesterday.

Hong Kong-based Jaspal Bindra (above), chief executive for Standard
Chartered Bank's Asian operations, told the Singapore Indian Chamber of
Commerce and Industry that the perceived risk of asset inflation was likely
to grow as a consequence of inflows of foreign direct investment.

And money pouring into developing countries could raise concerns about their
currency policies - particularly those that are pegged to the US dollar.

Mr Bindra said the challenge for emerging economies was whether they can
absorb capital, such as foreign direct investments.

'The lack of depth and breadth of capital markets means such flows find a
home in equity or real estate, adding to asset price inflation,' he said.

Mr Bindra's comments come at a time of rapid recovery in emerging markets
and inflation rises in countries such as China and India.

China's consumer inflation rose to 2.7 per cent in February from 1.5 per
cent in January, while India's central bank last month raised interest rates
for the first time in almost two years after inflation accelerated to a
16-month high in February.

Malaysia and Vietnam have also raised interest rates to fight inflation.

'Brazil's recent introduction of taxes to curb inflows highlights the path
some countries will take,' Mr Bindra said at the event held at the Tanglin
Club yesterday.

'It would not be surprising if more of such measures were introduced in
different countries, in an attempt to deter hot money and control the scale
of capital inflows.'

In October last year, Brazil imposed a 2 per cent financial transactions tax
on foreign capital entering the country for investment in equities and
fixed-income instruments.

Earlier this month, the International Monetary Fund said South-east Asian
countries may need to take measures to avoid asset-price bubbles.