Tags: Asia | credit | boom | crisis

Report: Asian Credit Boom Planting Seeds for Next Financial Crisis

By Michael Kling   |   Monday, 05 Nov 2012 10:47 AM

An explosion in credit is setting the stage for the next financial crisis in Asia, according to a new research report from Capital Economics, CNBC reports.

The current Asian credit boom is much like the credit explosion in Ireland and the Baltic countries in their run up before the 2008 financial crisis, the report warns. The situation is particularly dangerous in Hong Kong, Vietnam and China.

Hong Kong, where abundant credit has helped home prices boom, now seems disturbingly like Ireland just before the 2008 financial crisis, the research warns, according to CNBC.

Editor's Note: You Deserve to Know What Obama and Bernanke Are Hiding From Americans

Before the 2008 financial crisis, Ireland's economy grew rapidly due to a low corporate tax rate and low interest rates from the European Central Bank, in addition to other reasons, and property values skyrocketed. Then its economy collapsed.

The situation is almost as worrisome in China and Vietnam. “Although credit growth in Vietnam and China has been less alarming, it has still been very strong,” the report warns, according to CNBC.

In China, an increase in lending has prompted a strong increase in its manufacturing.

In Vietnam, the country’s property bubble is already popping. Property prices are falling, more loans are defaulting and economic growth is weakening.

“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,” Capital Economics states, according to CNBC.

Hong Kong has been trying to control its boom in property prices by increasing taxes on home purchases by companies and nonpermanent residents in order to increase the supply of homes and limit the influx of buyers from other parts of China, Bloomberg reports.

So far, the steps taken to rein in the property market have been largely unsuccessful, as prices have almost doubled in the last three years, according to Bloomberg.

“These are all buy-time policies,” Vincent Cheung of property broker Cushman & Wakefield tells Bloomberg. “The government’s doing this because new housing supply won’t come in for another two, three years. And between now and then, the forces that push prices up will always be here because the Hong Kong dollar stays cheap.”

Editor's Note: You Deserve to Know What Obama and Bernanke Are Hiding From Americans

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