By June 7, 2013 Read More →
A Perspective on Housing Bubbles in Asia

A Perspective on Housing Bubbles in Asia

As we have seen in recent years in developed economies, housing bubbles can wreak serious economic havoc as they burst. While this problem is often seen as one affecting mainly developed countries (US, UK, Spain, Ireland), economist Jayati Ghosh points out that it is, however,

just as possible for debt-driven private consumption bubbles to burst in developing countries – and several developing country financial crises have resulted from precisely that in the past. The experience of the Asian financial crisis in 1997-98, in which excess private indebtedness played a big role in causing the crisis in South Korea and Thailand, had provided a salutary lesson to most of developing Asia in the subsequent decade.

One of the main responses to the 2008 downturn in Asia was a large-scale effort on the part of several economies – mainly China – to boost domestic investment through the rapid expansion of credit, as a means of speeding up economic recovery. As Ghosh wrote in a recent article, the result of this explosion of in debt has been the growth of a series of bubbles in Korea, Hong Kong, Malaysia and China.  Speaking of the wider East Asian region, she notes that

Debt levels across the economy are rising beyond the ability of the various debtors to service them. Housing debt is just one of the problem areas. In the case of other forms of personal debt – such as credit card debt, debt to finance purchases of vehicles and student debt – there are similar and growing concerns about the capacity of borrowers to repay.

As these factors cause consumer spending to slow down, this is already affecting companies, and causing their debt to become more difficult to service. The corporate bond market, which had become incredibly buoyant in emerging Asia in the recent past, is also becoming a cause for worry.

Why might this matter? Rising debt burdens leave economies more vulnerable to external shocks. With Asia’s major trading partners and export markets in the US and EU posting low rates of growth, this puts all the more pressure on domestic investment in Asia to drive demand. But as Ghosh points out, “with these levels of indebtedness, the shocks that cause the next round of damage may even come from within.”

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(Wikimedia Commons image courtesy of Base64)

Posted in: Asia, China

About the Author:

William Oliver is Nabateans’ editor for international economics and Middle East current affairs. He obtained his degree in History from the School of Oriental and African Studies in London. While his studies focused on the Middle East in the 18th and 19th centuries, William has a long-standing interest in international finance and the political economy of development. William’s work is aimed at understanding how the Middle East integrates with the global economy, and into the wider geopolitical landscape.

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