On Wednesday, central bank Governor Perng Fai-nan (彭淮南) met ranking officials from three state-run banks and asked them to pay attention to the ability of borrowers to repay loans, not just admire the value of the collateral.
The central bank’s unusual move came just three weeks after it issued a press statement voicing concerns that an inflow of hot money would have adverse implications for the nation’s economic and financial stability.
It also came after the central bank increased sales of negotiable certificates of deposit and certificates of deposit to drain excess funds from the money market.
While the central bank declined to comment on whether the housing market is overheating, the perception in financial circles is that the central bank is using open-market operations to fend off a potential property bubble.
Coincidently, the Council for Economic Planning and Development last week invited academics to discuss ways of curbing the rise in house prices. Elsewhere, several government officials have expressed concern over the worsening problem of housing unaffordability.
An asset bubble is doomed to take place in Taiwan, as well as in other economies, after interest rates were cut over the past year to support slowing economies amid the global financial crisis. With interest rates so low, financial regulators now face a surging capital inflow and rising asset prices.
In recent weeks, governments including Singapore, Hong Kong, South Korea and India have adopted measures to prevent their domestic property markets from presenting bubble symptoms.
Experience suggests, however, that the limits of those measures will soon be reached, and that interest rate hikes will be the next step. A key question for central banks is how quickly they should act.
One concern is that raising rates too early might stall economic recovery in those Asian economies where signs of sustainable growth are yet to emerge.
Another concern is that, as risk appetite begins to build in Asia along with the rebounding economy, a quick rate hike would likely boost the so-called “carry trade” — in which investors borrow from countries with ultra-low interest rates and invest in countries with higher rates — thus aggravating what we have already seen in Asia with price surges in equities, real estate and other assets.
In its latest economic outlook for Asia released on Thursday, the IMF said that striking a balance between growth and inflation would be one of the three major policy challenges for Asian economies this year and next year.
Even so, the problem of excess funds in the money market is the most compelling issue for Asian economies, including Taiwan, at this time.
Rather than use credit-tightening measures to quietly discourage speculative financial transactions, governments might consider whether directing surplus capital into sectors that can generate real production — as opposed to financial investment in equities, real estate and commodities — is a wiser approach.
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