Column

George Bernard Shaw once famously said that even if all the economists were laid end to end, they would not reach a conclusion. That statement, said only half in jest, reflects a widely held view on the general incapacity of practitioners of the dismal science to arrive at unanimity or even a broad consensus of opinions.

Indicatively, for every economist who believes that the current recovery in investor sentiment in stock markets around the world represents that the worst of the financial meltdown and the global recession is over, there is another who holds — with equal vehemence — that this is irrational exuberance, and that the recession still has some way to go.

But increasingly, reflections on economic conditions and investor sentiments in Asia have managed to help forge the nearest thing to a consensus among economists: that an 'asset price' bubble is building up, particularly in the property and stock markets, and that governments in the region are nowhere near as concerned about it as they should be. This holds ominous portents for a region that, quite remarkably, never really felt the cruel impact of the global credit crunch in the same way that economies in the West did.

In particular, the froth that is building up in China is giving economists cause for deep disquiet. The Shanghai stock market index has doubled since November and, with officials signalling that their stance of adopting a loose monetary policy will continue, that feverish burst is likely to be kept up for a while. And in recent months, there has been a stampeding of buyers of real estate in Chinese cities, driving up prices; auction of property units is being telecast on television, evidently in a show of transparency, but this has only served to trigger a frenzy of me-too buying.

Economist Andy Xie, formerly of Morgan Stanley, goes so far as to say that Chinese asset markets have become "a giant Ponzi scheme" where prices are driven by expectation of appreciation, which draws in more people,which in turn drives up prices.

In November 2008, China, which experienced a sharp contraction in exports as a consequence of the global recession, unveiled a 4 trillion yuan ($585 billion) stimulus package to boost its infrastructure investments and stimulate domestic consumption. Additionally, China's banks have extended nearly 7.5 trillion yuan (over $1 trillion) in new loans, with more lending expected for the rest of the year. An astounding 50% of those new loans have found their way into the property and stock markets for speculative purposes.

It is evident that policymakers, in China and elsewhere in Asia, are being swayed by what is called 'bubble economics': the argument runs that rising asset prices, primarily for property and stocks, creates a "wealth effect" by raising the net worth of households and corporations, which in turn encourages them to spend and invest.

Some economists see this as a repeat of what happened in the US in the run-up to the collapse of the sub-prime housing market, which in turn led to the financial meltdown of 2008. The parallels aren't quite the same — economic fundamentals in Asia today, for instance, are vastly superior to what they were in the US — but there is enough in common to unsettle all but the most die-hard practitioners of 'bubble economics'.

The situation has been compounded by a flood of liquidity into Asia as perceptions of a sustained recovery in the US, however premature, are prompting an embrace of greater risk. One way to avert a more serious effect would be for Asian economic managers to decouple their monetary policy from that of the West, where low economic growth will mean low interest rates, and focus more aggressively on pricking the bubbles that have built up.

In other words, the economists appear to have reached a consensus. It's now time to lay Asia's monetary policymakers end to end and get them to reach a conclusion.