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A skyscraper under construction in Shanghai.

Eugene Hoshiko

The once-distant warning bells of new financial bubbles in the making in Asia are growing louder.

The International Monetary Fund, the World Bank and the Hong Kong Stock Exchange, Asia's biggest listed stock exchange, on Wednesday added their voices to the chorus lamenting the risks posed by excessive liquidity sloshing around Asian equity and property markets.

Emerging market equities have been on a tear for months, and property has zoomed back into bubble territory in China and Hong Kong, as speculators borrow capital at rock-bottom interest rates and plow it into any assets rapidly rising in value.

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In a growing trend, the speculators are borrowing U.S. dollars and putting the money to work in stronger currencies and other assets.

"We are seeing a return of the carry trade in a slightly different form," said Douglas Porter of BMO Capital Markets. "That's at least partly a factor driving some of the commodity markets and emerging market equities higher."

The typical carry trades of recent years involved borrowing yen at what were then the world's lowest interest charges and acquiring higher-value assets elsewhere. Now U.S. dollars have become the international currency of choice for such speculative moves.

Some emerging countries, notably Brazil, are moving to choke off potential bubbles and rein in their own soaring currencies by limiting the inflow of foreign capital. But no government is abandoning massive fiscal stimulus measures, and only a handful are contemplating such bubble-deflating measures as higher interest rates.

"In East Asia, if you start to get a strong rebound in growth, and you've got a lot of liquidity, there is the question of whether one could start to face asset bubbles in particular markets," World Bank president Robert Zoellick said in Singapore Wednesday.

He cited the fear of bubbles in the region as one reason behind two recent interest-rate hikes by the Australian central bank, but cautioned that governments have to be cautious about tightening monetary policy and unwinding stimulus, because of the risk of curtailing economic growth.

"I think one of the questions here will be the timing of how they manage the interest rates and the risk that they could get some inflation and even asset bubbles, which obviously, if they become a serious issue, could undermine confidence going forward," Mr. Zoellick told the Foreign Correspondents Association of Singapore, where he is attending the Asia-Pacific Economic Co-operation (APEC) meeting.

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"The bottom line is this: If you get off stimulus, you're going to cause a slowdown. But if you don't, you're going to cause bubbles," said Vitaliy Katsenelson, director of research with Investment Management Associates in Denver.

Mr. Katsenelson has long warned investment clients about bubbles building in China.

"Identifying such bubbles is a lot easier than timing their collapse," he wrote in one note. "But as we've recently learned, you can defy the laws of financial gravity for only so long."

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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