(EDITORIAL from the Korea Herald on Jan. 15)

Bubble warnings

Amid growing concerns that an easy monetary policy may be creating asset bubbles
in China, its central bank has recently taken action which many regard as a
prelude to an exit strategy.

On Tuesday, the People's Bank of China raised the
amount of money banks must hold from 14.5 percent of their deposits to 15
percent.
The 0.5-percentage-point increase in the reserve ratio followed warnings from
world-renowned economists and global financial institutions. They said Asian
assets, in particular those in China, may become overvalued as a consequence of
easing monetary policies in the wake of the financial crisis. They cautioned that
a stimulus package that was put in place for an unwarrantedly long period of time
would lead to asset inflation and economic instability.
Much of their concern was directed toward China, where the bulk of new loans is
reportedly channeled into the security and property markets. China recently
raised the minimum down payment on a second home from 30 percent to 40 percent.
Some Chinese economists are quoted as saying an increase in the central bank's
benchmark rate is likely to follow in the second half of this year.
Korea's exposure to the risk of asset inflation may not be as great as that of
China. Fortunately, the property market remains stable as a result of additional
restrictions placed on home financing last year. But Korean stocks have gained
more than 50 percent since last March. According to one estimate, Korea's market
capitalization has increased by as much as 410 trillion won during the past 10
months.
The possibility cannot be ruled out that asset inflation may get out of control
should speculative fever take the nation by surprise. The Bank of Korea has been
keeping its benchmark rate at a historic low of 2 percent for the past 11 months.
As a consequence, a broad measure of liquidity has increased more than 10 percent
since a global financial crisis set in last September.
It is a matter of time before a benchmark rate close to zero percent, together
with massive fiscal spending, starts to inflate asset prices. Nevertheless,
President Lee Myung-bak's administration is openly pressuring the central bank
not to take any measure to siphon off excess liquidity from the market.
Both the president and the finance minister have repeatedly voiced strong
opposition in the past to an early tightening of fiscal and monetary policy,
claiming that a premature exit strategy could stifle a burgeoning recovery. Of
course, their warning was directed at the central bank's governor, who hinted
last year that anti-inflation monetary measures would not be far behind.
The governor has since changed the tone of his remarks on monetary policy, saying
that he would keep the benchmark rate at a level conducive to an early recovery.
His remarks, however, were not reassuring enough to top policymakers in the
administration, as evidenced by an action taken by the Finance Ministry.
The ministry, whose vice minister recently sat on a monthly session of the
central bank's Monetary Policy Committee, for the first time in recent years,
says he will continue to do so.
His presence, supposedly aimed at policy coordination, does not go against the
law on the central bank. But the question is why the administration is asserting
its right to be represented in the committee's deliberations at this time. No one
should be to blame for wondering aloud if the nation is reverting to an era of
military-backed dictatorship, with the administration keeping a tight grip on
monetary policy.
The administration will do well not to cross the line separating a request for
policy coordination and an attempt to influence the central bank's
decision-making process. For its part, the bank should uphold its independence in
the fight against inflation.
(END)