Asian economies are still growing strong, but the massive credit to the private sector creates the foundation for the next financial crisis, according to analysts from British firm Capital Economics, quoted by CNBC.
“Credit for the private sector as a percentage of GDP rose sharply in recent years and is at a record level,” says the research study. The accelerated credit growth is most alarming in Hong Kong, Vietnam and China.
Even though for the developing economies the credit growth as a percentage of GDP is normal, economic advancement should not be fed largely from loans, as was the case in Ireland and the Baltic countries in the years before the financial crisis in 2008, according to the Capital Economics analysts.
Credit boom in Hong Kong is similar in a worrying way to the situation in Ireland before the crisis. Ireland’s economy grew strongly until 2008, supported by the low level of corporate tax. Also, the low interest rates of European Central Bank and other factors led to the expansion of credit and a speculative bubble in real estate.
Housing prices in Hong Kong have constantly risen in recent years as a result of this easy access to credit.
Prices should fall by about 30% for the market to return to balance, says Capital Economics.
The company warned against credit growth in Vietnam and China.
“Although credit growth in Vietnam and China has been less alarming, it has still been very strong,” reads the report quoted by CNBC.
Analysts are worried that the easy access to financing has led to strong expansion of manufacturing capacity, a situation that could affect short-term growth prospects.
“Private-sector credit as a share of gross domestic product [in Asia] has surged over the past few years and is now at an all-time high,” says the Capital Economics report.
Measures in Hong Kong to control the price rise with higher taxes on home sales made by companies and non-permanent residents had a limited effect on the real estate bubble: the prices have almost doubled in the last three years.
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