As the U.S. Federal Reserve unleashes $600 billion to stimulate the slowing American economy, Asia braces for a ripple effect.
Asia's main stock markets rallied Thursday after the U.S. central bank announced an anticipated move to buy U.S. government bonds. The move, known as quantitative easing, keeps interest rates near zero and encourages banks to lend to consumers and businesses.
Economists say stock prices could continue to rise in Asia as this flood of money finds its way to the region.
The Federal Reserve wants consumption in the United States to pick up to boost the sluggish economy and for prices to rise to fend off deflation.
But that could lead to a big problem elsewhere. Uwe Parpart is the chief Asia economist and strategist in Hong Kong for the U.S. securities dealer Cantor Fitzgerald.
"There are serious concerns that when the U.S. floods the world with dollars that find their way into equities, into stocks in Asia, whether in Hong Kong, in Thailand or Indonesia, the effect of that on the local economies can be quite difficult to cope with," Parpart said. "The large amount of cheaper dollars coming into the country not only ignites inflation, but you always have to think about whatever comes in quickly can also be pulled out quickly."
Norman Chan, chief executive of Hong Kong's de facto central bank, the Monetary Authority, is looking at the effect on the city's skyrocketing housing market.
"We will take measures that are specific to the housing markets," Chan said. "As far as the HKMA is concerned, we have introduced some measures that tightened [loan] underwriting standards. We will continue to monitor the market conditions and will introduce measures as appropriate."
Hong Kong interest rates mirror that of the U.S. because its currency is pegged to the U.S. dollar. The government here has already increased the supply of land for property development to ease housing prices.
Parpart says authorities in Asia are mindful of recent history when calibrating their responses to the U.S. stimulus. A flow of cheap capital in the mid-1990s created a boom, followed by a deep recession in 1997 when foreign investors suddenly withdrew those investments.
South Korea's finance ministry Thursday warned it may take aggressive measures to curb capital inflows. Thailand and South Korea, badly burned in the economic crisis of 1997, have already imposed limited capital controls.
Australia and India raised interest rates to stay on top of inflation, while the Bank of Indonesia Thursday kept interest rates steady.
A cheap dollar means stronger Asian currencies - which makes Asian exports more expensive. Some central banks, such as the Bank of Japan have been buying dollars to slow their currencies' rise. Some market analysts expect the Bank of Japan, in its meeting Thursday and Friday, to approve its own quantitative easing to boost the Japanese economy
The Taiwan dollar, the Korean won, Malaysian ringgit, and the Chinese yuan rose Thursday, but the dollar strengthened slightly against the Japanese yen.
All these concerns come as the leaders of 20 leading economies prepare to meet in Seoul next week to discuss ways to coordinate economic policies.