The Asian Bubble?

Is there an Asian bubble and are fears that it will burst justified?

Asian markets led the recovery out of the global financial crisis. They were in a far stronger position than developed markets, which were only just beginning the painful process of deleveraging.

Strong performance

By the end of 2010, according to Bloomberg, in sterling terms the FTSE All World Asia Pacific ex Japan Index had risen 114% from the low of March 2009. It outperformed both the FTSE 100 and the S&P 500, which registered gains of 67% and 66.6%, respectively.

Governments, corporates and consumers within the region were not overleveraged; Asia had experienced its own financial crisis in the late 1990s and was therefore in a much better position to weather the storm. Current account surpluses enabled governments across Asia to increase spending. Notably, China spent billions on improving its infrastructure.

The question now being asked is whether Asia has created a bubble. This is of concern, as bubbles tend to burst rather than deflate slowly. But all the signs show that China's economy is deflating, so this shouldn't be a worry.

Chinese deflation

Inflation in China has been a major issue, as food and fuel in developing markets are a much larger proportion of the average family's shopping basket. Food prices have been responsible for approximately 70% of the increase in China's Consumer Prices Index with short-term factors, such as natural disasters and disease, being the main contributors to the rise in food prices.

The likelihood is that inflation has peaked. Much of the tightening has been directed towards the property sector, so residential price growth has slowed considerably, especially in the first-tier cities, which experienced the...