Low Growth in the Developed World... Increasing Capital Flight to Asia!

Capitalist Exploits's picture

By: Chris Tell at http://capitalistexploits.at/

The first wave of modern globalization took place during 1870-1913, when both capital and labour moved freely across international borders. Things have changed a lot since then as ever increasing restrictions have emerged for capital mobility, due in part to a surge in nationalism and increasing levels of government interference in both domestic and international capital flows.

 Ever since the Bretton-Woods system, which emerged out of World War II, abandoned the dollar-gold standard, capital mobility has surged.

Figure 1: Net Foreign Private Sector Capital Flow in Asia (Percentage of GDP, Q4 moving average)?Source: IMF, Balance of Payments Statistics

Figure 1: Net Foreign Private Sector Capital Flow in Asia (Percentage of GDP, Q4 moving average)?Source: IMF, Balance of Payments Statistics

During the last decade net capital flows from the developed economies in Europe and North America have flown into emerging economies in Asia at a record pace. Beside the brief dips during the Asian Financial Crisis and the Global Financial Crisis, starting in 1997 and 2007, capital inflows to Asia have remained constant (Figure 1).

The “cheap money” generated by the U.S. Federal Reserve’s Quantitative Easing, and European Central Banks Long Term Refinancing Operations have found better returns in emerging economies in Asia, including the NIEs. Amid low interest rates offered by the Central Banks across developed economies, the trend has only solidified in recent years with capital inflows in Asia reaching an average of 4 percent of GDP in 2010. This is the first time since the start of the Asian Financial Crisis that such levels have been reached.

Also, as developed economies are slowing down, the risk adjusted rate of return of capital in these countries is low. Compare this to the high growth potential in the emerging Asian tigers.


Figure 2: Distribution of Capital Inflows by Country Source: IMF, Balance of Payments Statistics

Figure 2: Distribution of Capital Inflows by Country
Source: IMF, Balance of Payments Statistics

While the composition of capital flows are obviously different among Asian countries, as a basket (Figure 2), Asean-5 economies and NIEs have attracted the bulk of the disruptive capital flight after the global economic crisis. Also, these inflows serve different purposes in different economies. For example, Hong Kong attracted a large portion of banking flows while India’s inflows mostly went into portfolio-centric investments.

In order to minimize risk, the majority of the inflow funds in Asia are being invested with portfolio centric asset classes such as real estate and equity markets instead of Greenfield operations; witness the now unbelievable real estate values in Hong Kong, Singapore, Malaysia's cities and to a lesser extent Bangkok. This has created concerns regarding how to minimize the inflow spillover into asset markets in Asia in order to prevent another bubble.

Too late for that I'd say.

Additionally, these inflows are creating synthetic demand for local currencies in Asia which in turn have an effect of eating into the competitiveness of these economies as foreign exchange rates surge against global major currencies such as the US Dollar, Yen and the Euro.

The problems arising from these abnormalities of capital inflows in Asia has created its own set of problems, and regulatory restrictions are being imposed across the region to curb the externalities, such as diffusing asset bubbles.

Malaysia for example is imposing a 30% tax on real estate, which is seeing a rush to exit by domestic players. Interestingly I've still seen western investors continue to rush in. I can only guess they don't read the tax codes when deciding if they want that nice villa in Kota Kinabalu.

On the other hand, central bankers in the developed economies are living with a looming fear of a liquidity trap as these Asian economies are booming at their expense instead of creating sustainable growth at home.

Rocks and hard places...and the music plays on.

- Chris


"There are few options for emerging market countries to control the impact of capital inflows." - Kristen Forbes, MIT Sloan School of Management

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Duude's picture

A 30% real estate tax?  Apparently these guys don't know squat about maintaining the proper balance so as not to create the appearance of rash and clueless with their taxing authority. In a year the buying will reverse as fast as it soared and then what? Change it back? Now, you've completed the profile of clueless.

falak pema's picture

Oligarchy money flows back to Boris land.

Like it did to the Riviera from Czarist oligarchs and Aristocratic Brits at the turn of 19- 20th century. It didn't save the Europeans from suffering Armageddon in 1914; all that Riviera wealth went up in smoke. The real wealth fled to USA then...the new power house.

Today, real economic lifeblood flows the OTHER way towards the future economies of globe and this trend is inevitable.

Spot on. 

Your historical analogy rings an ominous sound for first world in corrupt doldrums. 

AngelEyes00's picture

Maybe China, the US, EU & Japan have all found the fountain of youth, i.e. QE.  China is leading the charge and because of it are buying up property all over the place.  The US is building huge bubbles, but maybe they will never pop, but simply provide opportunities for greater growth.  We can fantasize can't we?

johnmack's picture

i dont buy the flight of capital to Asia argument, Sure money is leaving the shores of America. But that doesnt explain the many asians who are on a global asset buying spree. Buying apartments in london,toronto, socal and sydney just to name a few.

Bear's picture

If it's flying to Asia why do 50 Chinese families visit every open house on the weekends in SoCal?

andrewp111's picture

That is regime flight - a totally different animal. They are not fleeing to find better returns on their money, they just want to avoid the executioner's axe they suspect is coming (actually, the Chinese specialize in bullet in back of head, but same idea).

ManWithaPlan's picture

Hah, ya thats a good idea invest in a communist country that won't hesitate to confiscate wealth when they experience their post industrial boom decline...mhmm

Bear's picture

They don't have to confiscate anymore they learned how to print, print, print. So, so much easier.

Seize Mars's picture

Oo la la. The Kate Upton pic is making me want to spank. I'll be back in a minute. (It won't take long.)

Seize Mars's picture

Also I don't think Kaley cuoco is that hot. Nice rear, but that's about it.

Seize Mars's picture

Bar Rafaeli needs a boyfriend? Why is it that sometimes really hot women can't get a boyfriend? Sometimes I think men are just intimidated, like she's out of reach or something.

Popo's picture

This writer is clueless. He doesn't see *anything* in the cards stopping capital flight to Asia?

How about the ongoing financial collapse in India? How about the brutal hard landing preparing to rip the face off investors in China? Or the revelations that China's central bank has been printing money like crazy and is now being forced to slow? How about a burgeoning revolution in Thailand? How about the outright collapse of Vietnam's banking system which is widely telegraphed by the OECD and World Bank? How about the swooning of Malaysia's economy and currency? How about critical household debt levels all over SE Asia, India and China? Etc. Etc. Etc.

andrewp111's picture

Yeah, and I'm sure that when the hard landing hits in China,  clueless foreign investors will get the biggest buzz cut. It will be just like shearing sheep.

Seer's picture

Yeah, but if you look past all that things look really good! </sarc>