ADB Sees Capital Inflows a Risk to Asia as Bond Market Grows 12%

Capital inflows into emerging East Asia risk flooding the region with cash, creating asset bubbles, as investors seek higher returns from the fast-growing economies, according to the Asian Development Bank.

Outstanding local-currency debt in the region rose 12 percent to $6.5 trillion in 2012, and increased foreign participation has reduced yields, the Manila-based lender said in its quarterly Asia Bond Monitor released today. Authorities have taken measures to curb inflows, with Taiwan’s central bank telling lawmakers in a March 15 report that global “hot money” has overtaken economic fundamentals in determining the direction of Asian currency and stock markets.

“These developments might put upward pressure on exchange rates, making exports less competitive,” the ADB said in the report led by Thiam Hee Ng, senior economist at its regional economic integration office in Manila. “There are concerns that higher levels of liquidity could lead to excess credit growth, thus fueling asset-price bubbles in the region.”

Six of the region’s currencies are among the top 10 performers among emerging markets in the past year, led by advances of 5.8 percent for the Philippine peso and 4.3 percent for Thailand’s baht. Yuan positions at local lenders accumulated from sales of foreign exchange to the central bank, an indicator of cross-border inflows to China, rose a record 684 billion yuan ($110 billion) in January, official data showed March 5.

Average Yield

The average yield on Asia’s local-currency debt fell 36 basis points, or 0.36 percentage point, in the past year to 3.6 percent on March 14, according to indexes compiled by HSBC Holdings Plc.

A key consideration in managing capital inflows for several of the small and open economies of the region is to have well- developed and liquid government bond markets, the ADB said in today’s report.

The lender classifies emerging East Asia as comprising China, Hong Kong, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Thailand and Vietnam. Developing Asian economies will grow 6.6 percent in 2013, bolstered by private consumption and investment, the ADB said in December.

To contact the reporter on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net

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