Hot money flows into Asia ebb - cause for alarm?
Hot money flows into Asia ebb - cause for alarm?
Wednesday July 13, 1:15 PM
Hot money flows into Asia ebb - cause for alarm?
SINGAPORE, July 13 (Reuters) - From falling currencies to declining foreign exchange reserves, evidence is emerging that less hot money is entering Asia as investors shift to higher-yielding U.S. dollar assets.
For Asian policy makers, more used in recent years to dealing with speculative funds flooding the region, that could pose major risks if investors look to pull their money out quickly.
"Hot money usually arrives and leaves en masse. Achieving a soft landing while dealing with hot money would pose a significant challenge," said Morgan Stanley economist Andy Xie.
Other analysts don't see any danger signals yet.
Investors may hesitate about pulling their money out of Asia too quickly since the U.S. economy is still troubled by large fiscal and current account deficits and Asian economic growth is set to pick up in the second half of 2005, they say.
Xie says a crisis in the form of speculative funds leaving Asia swiftly could be averted if China deftly manages the expectations for a revaluation of its yuan currency, or renminbi, the major factor that attracted hot money in the first place. ADVERTISEMENT
"China needs to handle renminbi revaluation expectations carefully to avoid a disorderly withdrawal of liquidity from Asia," he said in a research note.
Morgan Stanley estimates about $700 billion in speculative money is parked in Asia -- three times the amount that left the region in the Asian financial crisis in 1997/1998 and far higher than Asia's $200 billion annual trade surplus.
Xie said half the hot money was parked in China in expectation that Beijing will relent to international pressure and revalue its yuan currency, effectively fixed against the dollar, with another 25 percent in Japan and the rest in other Asian currencies.
STRONG DOLLAR
Analysts estimate private flows into China, the sum of the current account surplus, portfolio and direct investments, were about $150 billion in 2004.
For India, Thailand, South Korea, Taiwan and Singapore collectively, that surplus has averaged about $80-$100 billion a year since 1999, but is now falling.
The dollar flood of recent years boosted Asia's foreign exchange reserves by $538 billion in 2004 and by a trillion dollars since 2002. They now total over $2.5 trillion.
But the investment picture is changing.
A fast-growing U.S. economy has prompted the Federal Reserve to raise interest rates 9 times since last June.
The pace of exports, which has provided the main engine of economic growth in Asia, is faltering. Short-term rates in Japan, Thailand, Singapore, Taiwan and Malaysia are all below those in the United States.
"The speculative money was a weak dollar story. Now that the dollar is on a stronger footing, those speculative flows are going to drop off substantially," said Tim Condon, head of research at ING.
Reserves in Asia, excluding China where reserves are still rising, have fallen in four out of 6 months this year. Asian currencies hit multi-month lows this month.
Xie said hot money inflows declined to $8 billion a month between January and May 2005 from $23 billion a month in 2004 and $27 billion a month in 2003, mainly due to the "increasing cost of the weak dollar trade."
China would need to tighten policy measures to prevent a sudden outflow of funds and it should also resist pressure to revalue the yuan, to rein in speculators, he said.
Other economists are not so alarmed, noting Asia is still generating current account surpluses and its reserves are massive.
Mirza Baig, currency analyst at Deutsche Bank, said investors had probably stopped fresh purchases of Asian bonds and currencies, but they were not selling.
In addition, foreigners were still net buyers of regional equities.
Simon Flint, head of Asian currency strategy at Merrill Lynch, expects funds to come back into Asia soon as the U.S. twin deficits trouble the dollar and Asian growth accelerates.
"Maybe the relative rates story and the strong dollar story is tailing off," he said.
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Copyright © 2005 Reuters Limited. All rights reserved. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of Reuters Limited
Wednesday July 13, 1:15 PM
Hot money flows into Asia ebb - cause for alarm?
SINGAPORE, July 13 (Reuters) - From falling currencies to declining foreign exchange reserves, evidence is emerging that less hot money is entering Asia as investors shift to higher-yielding U.S. dollar assets.
For Asian policy makers, more used in recent years to dealing with speculative funds flooding the region, that could pose major risks if investors look to pull their money out quickly.
"Hot money usually arrives and leaves en masse. Achieving a soft landing while dealing with hot money would pose a significant challenge," said Morgan Stanley economist Andy Xie.
Other analysts don't see any danger signals yet.
Investors may hesitate about pulling their money out of Asia too quickly since the U.S. economy is still troubled by large fiscal and current account deficits and Asian economic growth is set to pick up in the second half of 2005, they say.
Xie says a crisis in the form of speculative funds leaving Asia swiftly could be averted if China deftly manages the expectations for a revaluation of its yuan currency, or renminbi, the major factor that attracted hot money in the first place. ADVERTISEMENT
"China needs to handle renminbi revaluation expectations carefully to avoid a disorderly withdrawal of liquidity from Asia," he said in a research note.
Morgan Stanley estimates about $700 billion in speculative money is parked in Asia -- three times the amount that left the region in the Asian financial crisis in 1997/1998 and far higher than Asia's $200 billion annual trade surplus.
Xie said half the hot money was parked in China in expectation that Beijing will relent to international pressure and revalue its yuan currency, effectively fixed against the dollar, with another 25 percent in Japan and the rest in other Asian currencies.
STRONG DOLLAR
Analysts estimate private flows into China, the sum of the current account surplus, portfolio and direct investments, were about $150 billion in 2004.
For India, Thailand, South Korea, Taiwan and Singapore collectively, that surplus has averaged about $80-$100 billion a year since 1999, but is now falling.
The dollar flood of recent years boosted Asia's foreign exchange reserves by $538 billion in 2004 and by a trillion dollars since 2002. They now total over $2.5 trillion.
But the investment picture is changing.
A fast-growing U.S. economy has prompted the Federal Reserve to raise interest rates 9 times since last June.
The pace of exports, which has provided the main engine of economic growth in Asia, is faltering. Short-term rates in Japan, Thailand, Singapore, Taiwan and Malaysia are all below those in the United States.
"The speculative money was a weak dollar story. Now that the dollar is on a stronger footing, those speculative flows are going to drop off substantially," said Tim Condon, head of research at ING.
Reserves in Asia, excluding China where reserves are still rising, have fallen in four out of 6 months this year. Asian currencies hit multi-month lows this month.
Xie said hot money inflows declined to $8 billion a month between January and May 2005 from $23 billion a month in 2004 and $27 billion a month in 2003, mainly due to the "increasing cost of the weak dollar trade."
China would need to tighten policy measures to prevent a sudden outflow of funds and it should also resist pressure to revalue the yuan, to rein in speculators, he said.
Other economists are not so alarmed, noting Asia is still generating current account surpluses and its reserves are massive.
Mirza Baig, currency analyst at Deutsche Bank, said investors had probably stopped fresh purchases of Asian bonds and currencies, but they were not selling.
In addition, foreigners were still net buyers of regional equities.
Simon Flint, head of Asian currency strategy at Merrill Lynch, expects funds to come back into Asia soon as the U.S. twin deficits trouble the dollar and Asian growth accelerates.
"Maybe the relative rates story and the strong dollar story is tailing off," he said.
--------------------------------------------------------------------------------
Copyright © 2005 Reuters Limited. All rights reserved. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of Reuters Limited
posted by Eastlaw at Friday, July 15, 2005
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