Even as the rest of the world struggles amidst an economic slowdown, many Asian nations have been plowing ahead. To be sure, growth has been curtailed, but in many Asian countries it is still above 5 percent. Optimism has fueled a borrowing and lending boom with consumers taking on household debt and businesses taking out loans to expand their operations. Now, some analysts are beginning to wonder if Asia’s continued growth is merely a mirage fueled by credit and real-estate bubbles.
The Chinese government seemed to learn its lesson from the 2008 Financial Crisis, when it launched a public-sector led stimulus plan that has resulted in billions of dollars of shaky loans being given out and wasteful infrastructure projects. Many other governments have also been trying to stress fiscal conservatism and have been hesitant to launch unnecessary projects.
Unfortunately, however, the domestic populations and businesses of many Asian countries do not appear to be following the same caution. Business and personal debts have been growing at a rapid pace, worrying many analysts at the IMF and other institutions. These businesses and private individuals seem to be following the same beliefs that their American and European counter-parts did prior to the 2009 Financial Crisis, namely taking out large loans while banking on the promises of tomorrow.
The total Credit-to-GDP level of Asia now rests at 104%, not far behind the European Unions 130% and well ahead of the U.S. 62%. This is a marked increase for Asia which had a credit-to-debt ratio of only 82 % just five years ago (2007). This ratio measures bank lending to private households and companies, largely ignoring government debts which fill the headlines. It is an important measure for determining the fiscal health of civil society.
So far business has been strong in Asia, and if economies continue to grow businesses and consumers alike will stand a better chance of paying off their debts. Still, in-spite of recent efforts by many Asian nations to become less reliant on exports, most Asian economies still rely on strong sales in Western markets. Given the range of domestic problems, including corruption, inefficient markets, under performing economies, and also unstable international markets, it is possible that the Asian economy could be derailed at some point. If so, it could set off a chain-reaction of problems with investors and consumers failing to repay loans.
Further, this wide-spread access to credit may be fueling a property bubble across many Asian countries. Cheap access to credit has spurred many Asians to purchase homes and real-estate. Housing prices in some areas, such as Hong Kong and Mumbai, have grown at breakneck speeds. Many of the hottest housing markets have seen prices increase over 70 percent since 2009. The market cooled off a bit in 2011 and has been relatively stable through 2012, however, some areas now have a glut of un-rented space in both the commercial and home sectors. If growth slows in the coming months it could pop the Asian property “bubble.”
So far investors and lenders have been more optimistic about the ability of Asian governments, businesses, and consumers to be able to pay back their debts due to strong growth rates and healthy levels of inflation. Of course, one could note that many investors and lenders felt the same about the United States and European Union before the 2009 Financial Crisis.