Asian Markets Steady Even Without Liquidity Pump

Source : The Business Times, August 14, 2007

Early trading in Europe, US shows signs of markets recovering

SINGAPORE) Asian stock markets regained their composure yesterday after central banks around the world helped ease fears of a global credit crisis by pumping money into banking systems.

Interestingly, central banks in Asia refrained from trying to boost liquidity in their own markets. They appeared confident that the fallout from sub-prime mortgage losses could be contained without injecting additional cash.

This approach seemed vindicated as Asian stocks mostly closed higher. The Straits Times Index ended the day at 3,380.61, up 21.43 points or 0.64 per cent. Seoul, which endured falls of more than 4 per cent last Friday, was up 1.1 per cent. Sydney gained 1.3 per cent and Shanghai surged 1.49 per cent to another record close.

The volumes traded were relatively light. The Nikkei-225 index closed up 35.96 points at 16,800.05. Turnover dropped to 2.47 billion shares from 3.35 billion on Friday.

Asian central banks, however, seemed largely sanguine.

The Reserve Bank of Australia yesterday supplied less than the usual amount of money to its financial system, while the Bank of Japan loaned 600 billion yen (S$7.7 billion), an amount it has supplied on more than 20 occasions this year.

In contrast, the European Central Bank (ECB), the US Federal Reserve and other central banks injected US$154 billion to their systems on Aug 9 and US$135.7 billion on Aug 10 to cool a credit crunch. ECB followed that up yesterday with another loan of 47.7 billion euros (S$98.8 billion), while noting that 'money market conditions are normalising'.

European markets rebounded in early trading yesterday. The UK's FTSE 100 Index rose 2.6 per cent to 6,194.70 points, France's CAC-40 gained 1.8 per cent to 5,546.11, while Germany's DAX Index advanced 1.5 per cent to 7,452.73.

In New York's morning trading, the Dow Jones Industrial Average gained 59.75, or 0.5 per cent, to 13,299.29 while the Nasdaq Composite Index increased 15.34, or 0.6 per cent, to 2,560.23.

Asia, however, needed no such booster for its markets as it is awash with cash. Malaysia's central bank governor Zeti Akhtar Aziz said yesterday that the region has 'high levels of liquidity'. Elsewhere in Asia, policy-makers also insisted there is enough money in the banking system to warrant them staying out.

'Asia is still full of liquidity,' said Tomo Kinoshita, chief Asian economist at Nomura Securities Co in Hong Kong. 'It's not necessary for Asian central banks to have further accommodative monetary policy.'

The region's markets attracted US$269 billion in capital inflows last year, according to the Asian Development Bank.

That's pressuring regional currencies to rise and creating bubbles in asset markets.

Central banks in Singapore, South Korea, the Philippines, Indonesia, India and Malaysia have said they are prepared to add cash into their systems if required. The Reserve Bank of New Zealand yesterday said it was 'business as usual' in its conduct of daily operations.

'In Asia, the financial systems are working so central banks are letting markets price risk as they should be priced,' said Robert Subbaraman, chief economist at Lehman Brothers Asia Ltd in Hong Kong. 'The ECB and the Fed needed to provide liquidity to stabilise the money markets but it is not clear that is happening in Asia.'

'A lot of countries here have seen massive capital inflows,' said Chua Hak Bin, an economist at Citigroup Inc in Singapore. 'When you talk about a liquidity squeeze, it's not a problem for everyone, definitely not for Asia. Money growth is more of a concern.'

China's money supply grew at the fastest pace in more than a year in July, even after the central bank raised interest rates three times this year and ordered lenders to set aside larger reserves on six occasions.

Meanwhile, policy-makers around the region are reassuring investors their economies are not at risk from a fallout from the sub-prime woes and the credit crunch.

Bank Negara's Ms Zeti yesterday said Malaysia has 'minimal' exposure to collateralised debt obligations.

Thailand's central bank governor Tarisa Watanagase last week said the nation's financial system is 'barely' affected by credit market losses caused by sub-prime loan concerns.

Local banks in Singapore have already indicated that their exposure to collateralised debt obligations is quite small, relative to their assets, and is not likely to impact their earnings.

Financial institutions in Asia excluding Japan have at least US$258 billion of bonds outstanding at the end of March, according to the Bank for International Settlements. By contrast, those in the United States have US$4.12 trillion of debt outstanding.

'Asia doesn't have as big a credit quality problem so the contagion effect is therefore limited,' said Nomura's Mr Kinoshita. 'After their bad experiences during the 1997 crisis, financial institutions have been keen to keep healthy assets.' - Bloomberg