Asian central banks

Asian central bankers continue to slash interest rates. In the past five months, the cost of borrowing has fallen by 375 basis points in Australia and by 189bp in China. South Korea lopped off another 50bp on Thursday, bringing its total to 325bp.

As elsewhere in the world, the impact of this easing has so far been minimal. That is not surprising given that interest rate cuts usually take upwards of 12 months to take effect. Any green shoots spotted now, such as the recent pick-up in lending in China and India, are probably transitory, reflecting a release of pent-up demand rather than a fresh investment push. Still, as Asia’s banks are generally in better shape than their US or UK peers and less fixated on shrinking their loan books, the theory is that lenders will channel cheaper money more quickly into corporate and household pockets. Asian governments also tend to be more persuasive when it comes to encouraging banks to lend.

But just how different is Asia, really? Loan demand is stunted for much the same reasons as elsewhere. Companies are retrenching not expanding. Workers are fearful for their jobs. The bubbles that foreshadowed the global crisis were thriving in Asia too, be that in Indian equities or Shanghai real estate, so asset price deflation and deleveraging are now equally present. In the financial centres of Hong Kong and Singapore, where property prices had surged, loan growth is falling. Falling bond issuance may indicate that net credit growth has shrunk, even where bank lending has risen. A final problem is that Asia’s recent monetary loosening marked a swift policy reversal. The region was still raising rates as recently as mid-2008 as central bankers tried to throttle rising inflation. That is the real curse of the lag effect: the impact of this tightening is still kicking in hard.