Quantitative easing (QE) and the prospect of more QE are fueling a surge of capital into Asia, as capital seeks higher returns, higher relative GDP growth, and the potential for currency appreciation.
You’ve probably heard of the situation before, and markets have surged in Asia as a result, but it could easily last another year and thus the ride could be far from over says Metal Miner:
The Asian and some other emerging economies have seen massive capital inflows over the last year and expect the trend to accelerate if more QE is enacted. According to a FT article, net private capital flows to emerging Asia are forecast to reach more than $270bn in 2010 and as much again in 2011, according to the Institute of International Finance. The World Bank and IMF are getting alarmed. Inflows of capital are posing a growing risk to East Asian macro-economic stability, according to the World Bank’s half-yearly review of regional trends quoted in an FT article.
This chart illustrates the scale of the capital flows following the last round of QE. The fear is further easy money will flood towards higher earning Asian markets and create a new Asian crisis similar to the late 1990’s. The inflows of hot money have the effect of driving up the currency. Even the Koran Won which is the only Asian currency still below the US dollar since the onset of the financial crisis rose by 7.6% over the last 3 months and the Korean central bank is spending US$1bn a day to try and keep it down. The Malaysian Ringgit has risen 11% already this year. The Thai Baht has risen 12% and the Japanese Yen 30%.
According to Kristin Forbes of the Massachusetts Institute of Technology, capital controls by Asian nations haven’t worked in the past, says Metal Miner.
Thus currency appreciation could be the only route Metal Miner believes… and a continued stock and property boom we’d add… with, sure, the potential for a crisis should the fund flows sharply reverse one day as we’ve discussed before here.