The new flood
It seems like we have watched this movie before. After three short years, the West is once again gripped by financial paralysis. This time, of course, the source is Europe, rather than the United States.
But, regardless, the world is seemingly being dragged into another crisis. Even in Asia, which has so far remained relatively unscathed, asset prices have now fallen sharply and trade threatens to slow in the coming months. Hong Kong, too, is feeling the pinch: the equity market has had an especially rough ride of late and the city's all-important logistics sector has started to sputter.
It is easy, therefore, to fear that the region will slide into a deep, nasty recession. In fact, recent chatter is striking an almost panicky cord; and even whispers about 1997 are making their rounds again. News headlines hardly help: the focus is squarely on Europe and a quick solution to the continent's dilemma doesn't appear to be in sight. It all feels a little hopeless, truth be told - the politics just isn't right on this one.
Still, much commentary on Asia misses the point. Yes, the West is struggling again with the now familiar demon of excessive debt and all that comes with it. And, admittedly, things look a bit shaky all around. However, there is another side to recent developments in the West, with powerful consequences for Asia, which is being entirely overlooked.
Central banks on both sides of the Atlantic have rolled out their guns again. In the US, the Federal Reserve recently announced a programme dubbed 'Operation Twist' that aims to push down long-term rates further by redeploying the central bank's balance sheet.
If that programme fails to have the intended effect, officials indicated that the option of another round of quantitative easing is still on the table. The Fed, in short, may commit itself to purchase more bonds, thus pumping yet more liquidity into the financial system. With fiscal consolidation set to start next year, the pressure on America's central bank to act more forcefully will only grow.
Meanwhile, in Europe, monetary officials have been busy as well. The Bank of England recently announced a second round of quantitative easing, buying more bonds from the market to help shore up Britain's financial system and economy.
Switzerland, too, is adding massive liquidity into the market, if for somewhat different reasons. Its currency has soared to damaging heights, prompting officials to short-circuit the market by flushing it with an abundance of freshly minted francs.
The European Central Bank has joined the fray as well. To be sure, it has long resisted the option of printing money outright. But this doesn't mean it is sitting on its hands. Far from it. Since 2008, and lately again with renewed vigour, the ECB is offering unlimited liquidity to individual banks in Europe. Recently, it even reinstated a programme to allow banks to borrow cash for up to one year, rather than just short term. Europe, obviously, has a number of problems - but lack of central bank liquidity is hardly one of them.
Where does all this leave Asia? Simply: with another wall of liquidity heading its way. Sure, with risk aversion on the rise, its effects are not visible yet. But, ultimately, cheap money in the West will head East in search of greater returns. We've been here before. In late 2008, the world looked even worse than it does now.
Growth and trade collapsed at unprecedented speed. But, within a few months, Asia was climbing its way rapidly back to prosperity. The flow of cash into the region did the trick. Asset markets soared, demand bounced back, banks felt confident enough to aggressively boost lending. The parallels with today are striking. And so it will prove this time around: massive liquidity injections elsewhere will eventually pump up Asia.
Alas, not all of this is necessarily to be welcomed. In the long term, certainly, all the cash could do a lot of damage, with spiralling inflation and asset bubbles still the primary risks. Policymakers thus need to remain vigilant, in Hong Kong as elsewhere. But, for now at least, don't worry too much about growth tumbling over: the region still has a wall to lean on.
Frederic Neumann is managing director and co-head of Asian economics research at HSBC
