Tuesday, July 17, 2007

Bank of Korea to Raise?

In bloomberg yesterday:

Bank of Korea May Raise Rates Again to Fight Asset-Price Bubble

July 16 (Bloomberg) -- Bank of Korea Governor Lee Seong Tae may increase interest rates for a second time this year to prevent money-supply growth from fueling bubbles in the stock and property markets, according to a survey of economists.

Lee and his board colleagues raised the overnight call rate to a six-year high of 4.75 percent last week, taking aim at record lending to small companies that threatens to spur inflation. Ten of 11 economists say the bank will increase the rate to 5 percent by December. One sees no change.

``The central bank's concern is that too much liquidity will lead to a bubble in asset prices,'' said Terence Lim, head of research at Goldman Sachs Group Inc. in Seoul. ``Once a bubble bursts, it will deal a huge blow to consumers and can tip the economy into a tailspin.''

Lee and Finance Minister Kwon Okyu say soaring lending reduces the financial health of banks and consumers, and may undermine the nation's longest economic expansion in a decade. South Korea has suffered the fallout from the end of a boom before. In 2004, a credit-card-fueled debt bubble burst as borrowers defaulted in record numbers, crimping economic growth.

The Kospi stock index rose 0.4 percent to a record 1970.85 at 9:36 a.m. in Seoul, taking this year's gain to 37 percent. The won traded at 917 per dollar, close to a seven-month high. The five- year government bond yield fell 2 basis points to 5.49 percent, after rising to the highest since December 2005.

Loans to small businesses soared to a record last quarter as lenders sought new corporate customers to overcome tighter rules for mortgages. Governor Lee says finance companies have a ``herd mentality'' that's fueling the supply of money and poses an inflation risk.

`Speculative Investments'

``The suspicion is that some small companies are diverting their borrowed funds into speculative investments in the property and stock markets,'' said Lee Sang Jae, an economist at Hyundai Securities Co. in Seoul.

Lending to small and mid-sized companies jumped 8.34 trillion won ($9.1 billion) in June from May, the largest gain since the central bank began compiling figures in December 2000.

``Loans to small and mid-sized companies are increasing sharply, while growth in household debt has slowed,'' Lee said in a speech to employees on July 13. ``Stock prices are gaining at a fast pace amid abundant liquidity.''

South Korean finance companies, such as Kookmin Bank and Woori Bank, have lent more and increased profits since recovering from the fallout of the 1997-98 Asian financial crisis that left them saddled with debt and pushed the economy to the brink of a national default.

South Korea sought a $57 billion bailout from the International Monetary Fund in December 1997, pledging to overhaul its financial system in return.

Asian Region

Now authorities are worried the pickup in borrowing once again raises the specter of loan defaults and may undermine 16 consecutive quarters of economic expansion.

South Korea is not alone in tackling the threat of asset bubbles. Capital inflows have inflated property and stock prices across the region, according to Singapore Prime Minister Lee Hsien Loong and other officials who attended the World Economic Forum last month, 10 years after Asia's financial crisis.

China's benchmark stock index has soared 98 percent this year as the country struggles to mop up the inflow of cash from record trade surpluses. Hong Kong apartment rents are the world's costliest.

South Korea's central bank and government last week both raised their forecasts for economic growth in 2007. Moody's Investors Service says it may upgrade the nation's credit rating, and reports in recent weeks showed exports surged to a record in June and consumers became the most confident in 15 months.

`Ultimate Concern'

``Not only liquidity but also economic fundamentals are supporting asset prices,'' said Kwon Young Sun, an economist at Lehman Brothers Holdings Inc. in Hong Kong. ``The Bank of Korea's ultimate concern is economic stability, in terms of prices and financial-system stability.''

Still, higher interest rates may choke off a recovery in the economy and also fuel gains in the currency that could curb export growth, according to economist Frederic Neumann.

``There are so far few signs that increased lending is stoking asset-price inflation,'' said Neumann, of HSBC Markets Ltd. in Hong Kong. ``Economic growth still remains below potential and significant risks in the form of high household debt remain.''

The won has surged to a decade-high against Japan's yen, making South Korean exports relatively less competitive than products made in Japan. Overseas shipments make up 40 percent of the economy and have been a key driver of growth.

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