IndiaÕs $900 billion economy has attracted $100 billion in capital in the 12 months through October, with a third of the money entering the country as overseas borrowings.

The New Year is a challenging one for Asian policy-makers. Year-end US closing stocks for wheat are the lowest in six decades; soybeans in Chicago touched a 34-year peak this week. Palm oil in Malaysia climbed to a record on Thursday, December 27.
The steeply rising cost of calories may be more than just cyclical, notes Rob Subbaraman, Lehman Brothers Holdings Inc. economist in Hong Kong. Growing use of food crops in biofuels and increasing demand for a protein-rich diet in developing countries may have pushed up prices more permanently.
The wholesale price of meat in China has surged 53 percent in the past year.
“Consumer inflationary expectations may soon rise, feeding into wage growth and core inflation, but we expect Asian central banks to be slow to react, initially due to slowing growth and later because of strong capital inflows,“ Subbaraman told Bloomberg.com.
If the US Federal Reserve continues easing interest rates to combat a housing-led economic slowdown, a surge in capital inflows into Asia may indeed become a stumbling block in managing the inflationary impact of higher commodity prices.
Food and energy account for more than two-fifths of the Chinese consumer-price index, compared with 17 percent for countries such as the UK, US and Canada, and 25 percent in the euro area, according to UBS AG economist Paul Donovan in London.
As Asian central banks raise interest rates--when the Fed is cutting them--they will invite even more foreign capital into the region. That will cause Asian currencies to appreciate, leading to a loss of competitiveness for the region’s exports.

Carbon Emissions
On the other hand, paring the domestic cost of money prematurely may worsen the inflation challenge. That isn’t all.
Higher oil prices will also boost the attractiveness of coal as an energy source, delaying any meaningful reduction in carbon emissions in fast-growing Asian nations such as China and India.
As Daniel Gros, director of the Centre for European Policy Studies in Brussels, noted in recent research, the price of coal--relative to crude oil--has been halved since the end of 1999. And per unit of energy produced, coal is a much bigger pollutant than oil or gas. This doesn’t augur well for the environment.
“Given that China is likely to install over the next decade more new power generation capacity than already exists in all of Europe, this implies that the current level of high oil prices provides incentive to make the Chinese economy even more intensive in carbon than it would otherwise be,“ Gros said.

Beijing Olympics
Climate-related issues will be in the spotlight in Asia this year. China’s eagerness to use the Beijing Olympic Games to showcase solutions to its huge environmental challenges will be one of the big things to watch for in Asia in 2008, Spire Research and Consulting, a Singapore-based advisory firm, said.
Even if China succeeds in reducing air pollution during the Olympics, the improvements may not endure after the sporting event ends on August 24, especially since the underlying economics continue to favor higher coal usage.
A drop in hydrocarbon prices might help check emissions and global warming, Gros noted last week on the website of VoxEu.org.
In fact, lower oil prices may also make food costs more stable by lessening the craze for biofuels. That will leave capital flows as Asia’s No. 1 challenge in 2008. And it won’t be an easy one for policy makers to tackle.

Capital Inflows
Take India’s example.
The $900 billion economy has attracted $100 billion in capital in the 12 months through October, with a third of the money entering the country as overseas borrowings, according to Morgan Stanley economist Chetan Ahya in Singapore.
This has caused the rupee to appreciate more than 12 percent against the dollar this year, knocking off more than three percentage points from India’s inflation index, says Lombard Street Research economist Maya Bhandari in London.
Naturally, exporters are complaining. So why doesn’t India cut domestic interest rates? It can’t do that without the risk of stoking inflation.
Money supply is growing at an annual pace of more than 21 percent in India, compared with the central bank’s target of between 17 percent and 17.5 percent. Inflation has held well below the central bank’s estimate of 5 percent for five straight months partly because of the government’s insistence on not passing the full cost of imported fuel to local consumers. It isn’t yet time for monetary easing in India.
China has it worse. Monetary conditions there remain dangerously loose. And China may be reluctant to do much about the undervalued yuan--the root cause of its record trade surpluses and the attendant liquidity glut--until the Olympics are out of the way.
Asian economies may, to a large extent, be insulated from the subprime mess. Still, 2008 won’t be all fun and games.

Nearly 50% of the British people are more likely to go on a diet or book a holiday than try to sort out their finances in January.

UK’s job market outlook is at its worst for a decade, according to a report from an employment organisation.
The Chartered Institute of Personnel and Development forecasts a net rise in employment of 75,000 in 2008, a third of the rise forecast in 2006 and 2007. The institute estimates unemployment will rise by around 150,000 to 1.8 million, or 5.8 percent of the workforce.
This year would be “easily the worst since the Labour Government came to power in 1997“, the institute said.
John Philpott, chief economist at the CIPD, told BBC that in the previous two years, a downward trend in public sector employment has in turn been more than offset by rising numbers of private sector jobs.
“But 2008 will be the first year for a decade that the engine of job creation will be spluttering right across the economy,“ he forecast.

Slowdown
Philpott warned that the slowdown in the job market could prompt “bigger cuts in interest rates than currently anticipated“ and prolong the effects of the economic downturn into 2009.
In the private sector, the institute said job losses will be felt most in financial services, which in recent years has “been a substantial driver of employment growth“ but is now “facing a direct hit from the credit crunch“.
Many financial firms and banks have been hit by exposure to problems in the US housing market. This has made banks reluctant to lend to consumers and each other, creating conditions known as a credit crunch.

Uncertainty
The Institute of Directors, a group representing business leaders, said the economy was “entering the most uncertain economic period for 15 years“, with forecasts being made when the full extent and impact of the credit crisis was still unclear.
The IOD said persistent inflation could prevent the Bank of England from cutting interest rates as much as it would like in order to cushion against slower growth.
“Much weaker growth and stubborn inflation will be the UK economic story for 2008. The years of plenty look as though they are about to end,“ said Graeme Leach, IoD chief economist.
In October, the Center for Economics and Business Research said that it expected 6,500 jobs to be lost in the City of London financial district during 2008, with cutbacks most pronounced in investment banking. The CIPD said that jobs were also likely to be lost in the public sector as the government attempted to improve public service efficiency.
A survey by recruitment firm Manpower found that UK employers were set to take on new workers at their slowest rate in six years in the wake of the credit crisis
Limited Options
Many analysts are warning that consumers may rein in spending when faced with deteriorating economic and job conditions.
“Any excessive spending over Christmas and at the New Year sales, especially where goods are paid for on credit, risks tipping even more consumers over the edge,“ said Mark Sands, director of insolvency at KPMG.
“The credit crunch is resulting in increased rejections of credit card applications and a reduction in the availability of loans secured by a second charge on the family home. Those in difficulty will find that their options are becoming limited.“
Figures from the Financial Services Authority (FSA) show that 48 percent of people are more likely to go on a diet or book a holiday than try to sort out their finances in January.
Just under a quarter of 16 to 44-year-olds are worried or scared about their bills arriving in the New Year, it said.
“The consequences of not managing your money properly can be devastating,“ said Chris Pond, FSA Director of Financial Capability. “If you don’t make payments on time, it can affect your credit history and, at worst, put your home and even relationships under pressure.“

Although emerging markets have not felt the recent financial market turbulence as much as developed economies, some emerging market countries may be vulnerable to a decision by investors to pull back capital, the International Monetary Fund said in its Global Financial Stability Report (GFSR).
This vulnerability may continue after funding problems in more mature markets subside, the twice-yearly report said.
Overall, emerging markets risks are balanced between slightly lower sovereign risks because of their generally good economic fundamentals and rising risks in some economies experiencing rapid credit growth and increasing reliance on flows from international capital markets.
Reflecting the same weakening in credit discipline that has led to problems in mature markets, “private sector borrowers in certain emerging markets are adopting relatively risky strategies to raise financing. Most noticeably, in some countries in Eastern Europe and Central Asia, banks are increasingly using capital markets to help finance credit growth,“ the report said.
Although the indicators suggest that banking systems in emerging markets are profitable, well capitalized, with diverse sources of earnings and sound asset quality, credit issues warrant increased surveillance as circumstances vary considerably across countries. Authorities in some emerging markets need to ensure vulnerabilities do not build to more systemic levels.
The GFSR highlights areas that warrant increased surveillance in some emerging markets, including:
*The growing market for privately placed syndicated loans for emerging market corporations that in some cases “may allow issuers to avoid the more extensive disclosures required by public listings.“ In some cases credit discipline appears to be declining with weaker credits and more first-time issuers becoming involved in the high-yield debt market. The private placement market has grown rapidly in emerging Europe, the Middle East, Africa, and to a lesser extent in Asia “partly at the expense of public bond and equity markets.“
*Rapid domestic credit growth funded by foreign borrowing, mainly “in emerging Europe and central Asia, which now absorbs nearly half of all international bank and bond financing.“ Foreign financing “has enabled banks to increase liabilities more rapidly than the expansion of local deposits would allow,“ but it puts at risk, especially, lower-rated banks “if appetite from international investors suddenly declines, potentially raising systemic risks for some banking systems.“ The report noted that international banks are often unwilling to lend to these banks through the interbank market because of the “difficulty of assessing their true financial condition“ but that “these same banks can still issue international bonds, though the risk is reflected in wider spreads.“
*Increasing use of carry trade-style external borrowing and growing use of complex credit products, especially in Asia. For instance, some emerging Asian firms borrow in lower-yielding currencies, primarily the Japanese yen, which are a cheaper source of funding than what is available in local currency. The search for higher returns has also led to growing issuance of complex credit products such as structured and synthetic instruments, possibly exposing investors to greater volatility.
The report also explored foreign investment flows to emerging markets. It finds that “contrary to what might be expected from reports of foreign investors crowding into small local markets,“ there appears to be little effect on equity prices from activities of institutional investors such as pension funds, mutual funds and insurance companies, although there is evidence consistent with herd behavior switching from one country to another within a region.
Hedge funds, and other highly leveraged pools of investment capital, are becoming more active in emerging market countries. They have moved away from their traditional fixed-income instruments there and are seeking other higher-yielding assets--both in equity markets and structured products. Some are operating with higher tolerances for risk and may raise important regulatory questions.