December 12, 2019

Influx of Cash in Asia Raises Familiar Worries

Asia’s fast-growing economies have weathered a tough 2012 relatively well, and economists say that unless the U.S. and euro zone economies take a sharp hit in 2013, the region could pick up steam again next year.

But that good news comes with a price tag. Analysts have begun to warn recently that Asia’s relative economic buoyancy could once again attract large amounts of cash, possibly leading to a repeat of what happened two years ago.

Back then, big inflows, mostly from the West, caused many emerging-market currencies to surge and prompted talk of “currency wars” as central bankers scrambled to keep their currencies from rising too fast.

Now, with growth in Asia picking up, and central banks in developed nations stepping up their efforts to oil the wheels of their beleaguered economies, the influx of cash is again starting to have worrying side effects.

Property prices, for example, have risen across much of the region. The South Korean won has climbed more than 5 percent against the U.S. dollar since late August. The Philippine peso has risen about 4 percent, to its highest level since early 2008. The Taiwan dollar, the Thai baht and the Malaysian ringgit also have strengthened.

“We could be heading back towards where we were in 2010,” said Frederic Neumann, regional economist at HSBC in Hong Kong. “Capital is pouring back into emerging Asia.”

Next year, said Rob Subbaraman, chief economist for Asia ex-Japan at Nomura in Hong Kong, “could be a bumper year” for net capital inflows. “The stars are aligned.”

For many parts of the world, a tide of capital would be a blessing. The United States, Europe and Japan have spent much of the last four years trying to reinvigorate their economies by lowering rates and injecting cash into strained financial systems through purchases of financial assets.

More is in store.

Last Wednesday, the U.S. Federal Reserve announced that it would continue to buy large amounts of Treasury securities and mortgage-backed securities until the job market improved.

Likewise, the Japanese central bank may step up its existing asset-buying and lending program at a policy meeting this week, analysts believe.

Over the years, some of that liquidity has seeped into parts of the world where growth is faster and returns are higher. The amounts of money flowing into developing Asia have, at times, been vast. During the rush in late 2009 and 2010, David Carbon, an economist at DBS in Singapore, estimated, the region saw inflows to the tune of $2 billion a day, for example.

Economists at the Japanese bank Nomura estimate that between early 2009 and mid-2011, net capital inflows to Asia, excluding Japan, totaled $783 billion — far more than the $573 billion that came in during the preceding five years.

The renewed inflows in recent months have not been so large. Moreover, not all countries have attracted cash in equal measure. Investors have been wary this year of India’s seeming inability to push through important economic overhauls, for example. That has caused the rupee to sag more than 11 percent since February. China, meanwhile, restricts incoming foreign investments to relatively small amounts.

Elsewhere in the region, however, there are signs of renewed pressure.

An index compiled by Nomura that gauges capital inflow pressures has risen in recent months, said Mr. Subbaraman, the Nomura economist. Although it remains below where it was during the spike in 2010, it is now at its highest since May 2011.

Said Mr. Neumann of HSBC, “currencies have strengthened despite resistant central banks, real estate markets are frothing away, and lending to consumers and companies has accelerated.”

All of that has reignited the concerns that traditionally accompany major — and potentially fickle — capital inflows.

For exporters, stronger currencies are a headache, as they make the exporters’ goods more expensive for consumers elsewhere.

For ordinary citizens, rising property prices make homes increasingly unaffordable. Soaring property prices are also vulnerable to painful reversals if conditions change.

Underscoring that point, the International Monetary Fund warned on Wednesday that a sharp rise in house prices in Hong Kong raised “the risk of an abrupt correction.”

Likewise, a big increase this year in corporate bond issuance — while a positive in that it supports growth and diversifies corporate funding — bears risks.

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