Sparked first by Japan's economic woes and then by the wider Asian crisis, a tidal wave of foreign capital has flowed into U.S. government securities in recent years, helping to push bond yields below 6% in the face of a strong U.S. economy. Now, fears are growing that U.S. financial markets could be rocked by an exodus of capital out of Treasuries and back to Asia to prop up ailing banks.
Economist Gerard MacDonnell of The Bank Credit Analyst thinks such fears are exaggerated. "Economic logic," he says, "argues against repatriation of Asian capital anytime soon." Achieving recovery in ailing Asian nations depends on their running trade surpluses, and that implies that rising Asian export earnings will be available for recycling into U.S. Treasuries.
MacDonnell notes this wasn't true earlier in the decade. Despite national savings rates running at a huge 30% to 40% of gross domestic product and hefty exports, most East Asian nations were actually investing more than they saved. Foreign loans filled the gap, paying for huge imports of investment goods that pushed their overall trade balances into deficit. The upshot was overcapacity, falling profits, and, most recently, the bursting of the investment bubbles, with painful effects on capital flows, exchange rates, and economic activity.
Now, as Asian trade balances shift into surplus and domestic investment slows, says MacDonnell, national savings rates are set to move even higher. After all, he notes, fiscal policy is being tightened in most Asian nations and consumers who have been traumatized by plunging stock markets and weakening employment will inevitably spend less and save more.
At the least, MacDonnell estimates that Asia's savings in excess of investment needs will rise by about $65 billion this year. And if private investment declines significantly--as it did in Japan when that nation's investment bubble burst in the early 1990s--he figures the increase in surplus savings could be as much as $160 billion, providing ample support for U.S. bonds.
"The powerful combination of growing trade surpluses, rising savings, and sharply slowing investment," says MacDonnell, "implies that Asia will be a big exporter of surplus capital in 1998."