Region
However, this strategy is difficult to pull off in prac-
Currency appreciation
would help to alleviate
some trade imbalances
Asian stockmarkets have
rallied strongly this year
6 Business Asia October 26th 2009
pects. Exports have traditionally been one of the
tice, and is only really a short-term solution at best.)
Finally, allowing currencies to appreciate further
would help to reorient Asian economies away from
their traditional dependence on exports (while also
reducing the global economic imbalances that con-
tributed to the financial crisis). A big appreciation
would increase consumers’ purchasing power, boost-
ing private consumption. It would also lead to an
increase in imports at the expense of exports, lower-
ing the region’s large current-account surplus, which
in 2008 stood at 4.2% of regional GDP. In theory, a
fall in Asia’s current-account surplus should also
show up in a fall in the US current-account deficit.
This would help with the process of global econom-
ic rebalancing.
Outlook
Despite these arguments, further currency appreci-
ation in Asia is likely to be modest because of con-
tinued concerns about the region’s export pros-
Economy
Bubble fears
Ultra-loose monetary policy has helped economies in the region to rebound, but rising asset prices are causing
concern
Policymakers across Asia are increasingly worried
about asset-price inflation, amid signs that specula-
tors have returned to stock and property markets.
Ultra-loose monetary policy has contributed to a
rebound in economic growth in most countries. But
as economies around the region begin to record
stronger-than-expected recoveries, concerns about
asset-price bubbles are likely to push central banks to
start raising interest rates again.
Although asset-price bubbles can only be reliably
identified in hindsight, the rebound in stock prices
seems difficult to justify given the depth of the recent
recession. After plummeting as the recession hit in late
2008, regional stockmarkets were up around 50% by
September 2009. The improving economic outlook
partly justifies a rebound in stock prices, but some
regional stockmarkets are now looking overvalued.
There are also concerns that that the flood of
cheap money has drawn speculators back into the
property market. Property prices have soared over
the past few months, especially in Hong Kong, China
and Singapore. In Singapore, for example, property
prices have returned to their pre-crisis highs, even
though the economy only recently emerged from a
savage recession in which GDP slumped by nearly
10% year on year in the first quarter. In China, an
estimated 20% of new lending has found its way
either to the stockmarket or to property, leading to a
70% surge in house sales since the start of the year.
key drivers of economic growth in Asia, and the
slump in export demand at the end of last year hit
most economies in the region hard. Although
exports are starting to grow again on a “sequential”
month-on-month basis, they are still well below
their year-earlier levels. Governments are unlikely
to allow further meaningful currency appreciation
until exports start to show signs of a more robust
and sustained recovery.
Furthermore, Asian countries remain concerned
about losing competitiveness relative to China, the
region’s biggest exporter. So long as China continues
to prevent the renminbi from rising, other govern-
ments in the region are unlikely to allow more sig-
nificant appreciation of their own currencies.
Although the renminbi should start to appreciate
again in 2010, it will do so at a very moderate pace
(around 3% a year).
Source: EIU ViewsWire
In the short term, rises in asset prices should sup-
port growth prospects through the wealth effect—
consumers who have seen a big increase in the
value of their wealth will spend more. However,
while a rebound in stock and property markets may
be a welcome sign that investor and consumer con-
fidence is improving, it also raises serious concerns.
Central banks are worried that the bursting of a
property or stockmarket bubble would lead to a
painful correction and further economic hardship.
As in the case of the US housing bubble, this could
lead to a rise in bad loans for banks, leaving them
reluctant to lend. It could also tip households into
negative equity, causing consumers to save more
and consume less—depressing growth prospects
once more.
Monetary tightening
Aware of the problems that the current ultra-loose
monetary policy is creating, central banks through-
out Asia and Australasia are set to tighten. On
October 6th the Reserve Bank of Australia became
the first central bank in the region to begin raising
interest rates, boosting its main cash rate by a quar-
ter of a percentage point, to 3.25%. Even though other
central banks have yet to start raising interest rates,
policymakers in Singapore and China have already
started tightening mortgage requirements to counter
a rise in property speculation.
© The Economist Intelligence Unit Limited 2009

As economic conditions improve, other central
banks in Asia will also start to raise interest rates.
However, this does not mean that monetary policy
will be returning to normal any time soon.
Monetary conditions will remain very loose by his-
torical standards for some time to come, as policy-
makers look to support domestic demand amid con-
tinued uncertainty over the timing and pace of the
global economic recovery.
Inflation
Along with the strong rebound in asset prices, con-
sumer prices have also started to recover. After weak-
ening dramatically over the past year, consumer price
growth will pick up as the economic recovery takes
hold. The Economist Intelligence Unit forecasts that
average inflation in Asia and Australasia will fall from
5.7% in 2008 to just 1.9% in 2009, before increasing
slightly, to 3.2% in 2010 and 3.3% in 2011. The decelera-
tion in inflation has been region-wide, with all but
one (India) of the 17 Asian economies covered by our
Country Forecasts expected to record lower inflation
this year than last. Overall, five economies (China,
Hong Kong, Japan, Taiwan and Thailand) are forecast
Industry
Resource boom, or curse?
Mongolia has signed a major deal for the development of gold and copper reserves. The deal is a potential boon to
the economy, but it risks making Mongolia even more dependent on commodities
On October 6th the Mongolian government signed a
long-awaited agreement with Ivanhoe, a Canadian
mining firm, to develop Mongolia’s biggest copper
and gold deposit. The project has the potential to
transform the country’s economy, which has been
hit hard by the global financial crisis and the plunge
in commodity prices at the end of last year.
However, the mine will not reach full production
capacity for nearly a decade, and the government
needs to manage Mongolia’s newfound mineral
wealth carefully.
The Oyu Tolgoi deal has been in the works for a
long time. Ivanhoe first acquired the mine from
BHP, an Australian mining company, in 1999.
However, a conflict between the government and
Ivanhoe over how to share the proceeds has held up
the development of the mine until now. In the
meantime, the proposed deal had important politi-
cal and regulatory knock-on effects: differences
between the government and Ivanhoe led to the
collapse of the previous coalition government in
2006 and the introduction of a controversial wind-
fall tax on foreign mining companies’ profits.
Following the collapse in commodity prices and
under pressure from Ivanhoe, the government even-
tually repealed the profits tax in August this year,
© The Economist Intelligence Unit Limited 2009
Region/Mongolia
to experience deflation for the whole of 2009.
The main reason for the sharp falls in inflation in
2009 has been the collapse in demand across the
globe, which has caused prices for commodities,
including food, to plummet. The collapse in eco-
nomic growth rates across Asia also led to the emer-
gence of a large output gap in most countries, leav-
ing companies with little pricing power. Now, how-
ever, this process is running in reverse, thanks to the
unprecedented loosening of monetary and fiscal Rising commodity prices
policy in Asia, as well as the return of relatively will create inflationary
strong economic growth. These factors are helping pressures
to reduce or eliminate the output gap, giving compa-
nies pricing power again. Commodity prices,
including for oil and food, will also increase, putting
more upwards pressure on prices. As a result, we
forecast that consumer prices will rise in every
Asian country apart from Japan in 2010. However,
inflationary pressures will remain relatively
muted—only five countries (Vietnam, Sri Lanka,
Pakistan, India and Bangladesh) are forecast to have
average inflation of over 5% next year.
Source: EIU ViewsWire
paving the way for the agreement to be signed.
The huge Oyu Tolgoi mine could provide a sig-
nificant boost to Mongolia’s economy. Although
production is not scheduled to begin until 2013, a
2005 estimate by Ivanhoe (which the company is
preparing to raise) said that production will average
1bn lbs of copper and 500,000 oz of gold annually.
Under the terms of the finalised investment agree-
ment, the Mongolian government will own 34% of
the mine, with Ivanhoe holding the remainder.
However, the main investor in the project will be
Rio Tinto, an Anglo-Australian mining company,
which bought a 10% stake in Ivanhoe in 2006, with
the option of increasing its stake to 47% over the
next two years.
The vast majority of Oyu Tolgoi’s copper will be
exported to China, which has emerged as the
world’s biggest consumer of the metal. Over the past Most of the copper will be
three years China’s imports of copper have tripled, exported to China
and demand is expected to continue to soar. Given
the mine’s vast reserves, the Oyu Tolgoi project
could operate for several decades, generating tens of
billions of dollars in revenue. But before the mine is
fully operational, Mongolia (probably with financing
help from China) will need to construct a railway
from the mine to the Chinese border 80 km away.
Business Asia October 26th 2009 7