HONG KONG: As debates continue on whether interest rate hikes in Australia recently have flagged a global rate-rise cycle, there are also indications that countries are beginning the process of effectively exiting from monetary stimulus regimens.

With economic conditions improving as shown by many positive indicators, some major countries have initiated or are mapping exit strategies from the super-loose monetary policies implemented after the eruption of the global financial tsunami.

Australia's central bank led the tightening process by raising its benchmark interest rate by 0.25 percent earlier last month and another 0.25 percent this month, while the Norwegian central bank raised its official borrowing costs by a quarter point on October 28, becoming the first to do so in Europe.

Meanwhile, India's central bank recently surprised market watchers by removing some liquidity support measures that were implemented to protect Asia's third-largest economy from the global recession, paving the way for a rate hike soon, as believed by many. South Korea's central bank has also signaled its readiness to raise borrowing costs.

While major central banks around the world, including the People's Bank of China, the Federal Reserve, the European Central Bank and the Bank of England have not signaled any rate-hike moves, monetary authorities and banking regulators in these countries have taken steps to reduce market liquidity.

The Federal Reserve kept its key rates unchanged during its latest monetary meeting held last week. But it decided to reduce the maximum amount of its agency debt purchases to $175 billion from the $200 billion announced previously.

By purchasing agency debts, which are mostly issued by a US government-sponsored mortgage-lending agency, the Fed injects liquidity into the market.

"In order to promote a smooth transition in markets, (it) will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities," the Fed said in a statement after the meeting.

Meanwhile, the European Central Bank and Bank of England also signaled after their policy meetings last week that they would gradually unwind some emergency liquidity support measures implemented after the financial crisis.

China, while emphasizing the need to maintain a "moderately loose" monetary policy and a "proactive" fiscal stance, is taking steps to tighten liquidity in financial markets.

The country's banking regulator, the China Banking Regulatory Commission, issued a draft regulation late last month, asking banks to tighten approval for personal loans.

Personal loans in China have been rising, with new individual consumption loans approved in the first half of the year reaching nearly 651 billion yuan, up 60 percent over last year. Some of these loans have reportedly found their way into the equity market.

All these tightening moves suggest that governments do not consider the economy and the markets to be in such bad shape, while the stimulus exit process has started in some countries in effect, if not in name.

So the next question investors probably care about most will be how will it impact asset markets?

Many market watchers believe the process may affect asset markets in two ways, in theory at least.

Firstly, some experts believe tighter liquidity could slow down the current uptrend in asset prices or even trigger a significant correction after their sharp gains this year, boosted by super-loose liquidity conditions.

Secondly, some commentators believe monetary tightening are likely to dent prospects for corporate earnings, a scenario that will prompt many investors to rebalance their portfolios. This will inevitably cause some fluctuations in asset prices.

That said, the impact is expected to be moderate and absorbable by markets, as governments are unlikely to implement their exit strategies in a hasty and drastic way. This is particularly true in China, as the country still relies much on infrastructural investment for economic growth, with another growth engineer - the export sector - remaining.

(HK Edition 11/13/2009 page3)