December 26, 2006

Asian Central Banks May Spook Investors in 2007

Dec. 15 (Bloomberg) -- While a housing-led slump in the U.S. economy may indeed emerge as the biggest risk to Asian economies in 2007, a more immediate threat to investors will probably be posed by the region's central banks.

Policy makers in China, South Korea and India may have no option except to aggressively contain domestic liquidity and stamp out asset-price bubbles even as the U.S. Federal Reserve and the European Central Bank get closer to ending their monetary tightening cycles.

Relying on ``shock therapy,'' central banks in these countries might end up making overstretched securities -- such as Indian and Chinese equities -- more volatile than they have to be. A case in point was the bloodbath on Indian stock markets earlier this week.

In the absence of a full-blown U.S. recession, an intolerable surge in oil prices or a sudden aversion for financial risk, the global environment is likely to prove fairly stable in 2007.

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