Asian Economies Warned of Capital Spikes

May 19, 2010 Taxation in ChinaTaxation in Hong KongTaxation in IndiaTaxation in PhilippinesTaxation in SingaporeTaxation in South KoreaTaxation in ThailandTaxation in Vietnam

Independence Monument - Phnom Penh, CambodiaGovernments of emerging Asian economies have been warned to be ready for sudden increases in investment capital inflows, and prepare appropriate policy responses.

On May 18th the Asian Development Bank (ADB) released its annual Asian Capital Markets Monitor report, which investigates the performance and outlooks for the equity, bond and currency markets in emerging economies. According to the report, several factors have cumulatively increased the risk of Asian economies facing sudden high levels of investment capitals, leading potential destabilization of currency and financial markets.

Amidst worries of a continued national debt crisis in Greece and the Euro-zone, international investors have been paying greater attention to Asian economies. The interest has been further increased by the area’s swift and secure return to a positive economic condition after the international economic crisis. The ADB claims that the increased capital inflows could trigger significant upwards pressure in national currency, leading to volatility in valuation and the financial markets. Additionally, national inflation, which among emerging Asian economies is widely considered to be manageable, could be caused to increase. Cumulatively, sudden burst in overseas investment capital might lead to limitations in short and mid-term growth potential for emerging Asian economies.

The ADB recommends that Governments of vulnerable economies take action now to ensure that appropriate national policies are ready for potential investment inflows. Suggested policy considerations consisted of sound macro-economic management, flexible foreign exchange regimes, increased resilience of national financial systems, along with temporary and targeted capital controls. The suggestion of capital controls is especially aimed at nations which expect capital inflows to be transitory with significant destabilizing effects on exchange rates, and with uncertain national macro-economic policies.

Under the ADB’s classification, the emerging Asian economies consist of the People’s Republic of China, Hong Kong, India, Indonesia, the Republic of Korea, Malaysia, the Philippines, Singapore, Taipei, Thailand and Vietnam.

Photo by ethan.crowley