At the latest G20 meeting in Washington, some global financial leaders expressed worries about the potential damage that the eventual unwinding of easy monetary policies of the United States and Japan can inflict on emerging economies.

International Monetary Fund head Christine Lagarde allegedly told reporters that the extraordinary efforts by US and Japanese central banks were appropriate for now, but acknowledged the concerns of emerging economies about the potential for destabilizing capital flows and upward pressure on their currencies.

It's a well-known fact that a substantial portion of the liquidity created by these central banks to stimulate investment and spending at home has gone to various emerging markets in search of higher return. The Institute of International Finance estimates that emerging markets have received net foreign capital inflows of $3.3 trillion since the US Federal Reserve began its quantitative easing programs three years ago. The flood of new capital into these emerging markets has pushed up exchange rates of the host countries' currencies and inflated assets' values, creating asset bubbles that are waiting to burst.

That could be triggered by a reverse in capital flow when the same US and Japanese central banks decide it is time to terminate their easing programs. When that happens, investors might dump bonds, leading to a jump in long-term interest rates that could disrupt capital flow to emerging markets, cause losses at banks and increase credit risks, the IMF has warned.

Some commentators in Hong Kong have raised similar concerns, attributing the surge in property prices in the past several years to the inflow of hot money from the US. For that reason, they contend that an economic recovery in the US could spell disaster for Hong Kong.

To be sure, the property bubble in Hong Kong is a real issue that has become increasingly worrisome to financial officials and some lawmakers. But it seems most unlikely that the overheated property market was fueled by the inflow of speculative funds from US corporate or institutional investors. Instead, many property market analysts have identified the mainland as the major source of overseas capital invested in Hong Kong real estate.

The ending of US quantitative easing, of course, would affect the Hong Kong economy through the peg exchange-rate system. Any tightening in the supply of liquidity could push up bank interest rates in the US. This could, in turn, lead to an appreciation of the US dollar against most major global currencies.

Because of the peg exchange-rate system, bank interest rates in Hong Kong are bound to move in tandem with the US. A big leap in bank interest rate could choke demand and depress prices to a point which threatens to unnerve lenders and trigger a crash, economists warn.

This sounds like a worst-case scenario which can only happen against the background of a regional financial crisis with devastating effects, much like the one in 1997. But Asian economies are not as exposed to foreign debt as they were back then. The likelihood of another Asian financial crisis seems remote, although the full effect monetary easing in Japan has on the region is yet to be felt.

What's more, current talk about the end of monetary easing seems premature. The growth in consumer spending in the US in March, encouraging as it may seem, was largely caused by an increase in demand for utilities because of the colder weather. "When you extract from that, spending was less than impressive in March," said Ryan Sweet, a senior economist at Moody's Analytics.

Most economists agree that the US economy is cooling, giving the Fed a strong reason to continue pumping money into the economy while inflation remains low.

There is still time for the SAR government to try to deflate the property-market bubble by requiring banks to strengthen their balance sheets. The recently introduced tax raising the cost of Hong Kong property to overseas buyers was a step in the right direction.

The author is a current affairs commentator.

(HK Edition 05/09/2013 page1)