HEAD OF ASIAN DEVELOPMENT BANK WARNS ABOUT HUGE LIQUIDITY IN THE REGION

The head of the Asian Development Bank recently warned in a statement that something must be done to sterilize the $2.3 trillion (that’s right; trillion) of reserves in the coffers of the major Asian nations’ (primarily China, Russia and Japan) central banks. These reserves must be sterilized, or it is likely to create inflationary pressures and bubbles in certain areas, like real estate.

Our response to his statement: “He is late with this warning.” This immense cache of money held by central banks has already sent the money supplies of many nations running up in the recent months and years. This has sent the loan growth in the region skyrocketing, which has had the effect of pumping trillions into regional and world real estate markets. It has been creating the bubbles that he is now warning about.

Many nations are now starting to reallocate their surplus reserves. Oil rich countries are beginning to sell dollars and shift into a variety of other currencies and assets.

China and a few others have already announced they are doing so. Others will also do so without announcing it. China, Korea, Singapore and others have offshore investment arms which will take some of the surplus and invest it in stock markets and currency markets globally. We do not doubt that the big rise in the Chinese stock market last year after six and a half years of sideways movement was partially caused by government funds moving into Chinese stocks. This will continue in any countries which have strong tailwinds for growth. Some of the countries with strong tailwinds for continued growth are India, Hong Kong, China and Singapore among others.

These markets are volatile, so we prefer to buy when they are declining. As we have often mentioned, we suggest sticking to legitimate companies traded in countries where corporate governance is good, where strong securities regulation exists and where accounting and legal strictures exist.

© 2007 Monty Guild
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