After shrinking sharply in 2008, net capital inflows into developing East Asia surged to a record in 2010. Inflows were highly concentrated in China, Indonesia, Malaysia and Thailand, according to the World Bank's East Asian and Pacific Economic Update-2011 published today.
Globally, nine countries received 95 per cent of the portfolio equity, 50 per cent of the portfolio debt and 74 per cent of the short-term debt flows to all developing countries, it said, adding that East Asia’s experience with capital flows during and after the global economic crisis contrasts with the period after the 1997–98 Asian financial crisis when the crash was more severe -- although concentrated in three countries: Indonesia, Thailand and Korea -- and the revival slower.
Inflows of foreign direct investment and bank flows have also recovered. FDI inflows to East Asia held up well during the crisis, declining in 2009 only to 2007 levels before recovering in 2010. Cross-border credits from foreign banks have also returned, in particular to China and the middle-income countries. Foreign banks, which pulled back from the region at the onset of the global financial crisis and are still retrenching globally, have steadily rebuilt their assets in the region.
Outward investment by East Asian residents has also strengthened substantially. China, Malaysia, and Thailand have become significant sources of FDI in foreign markets. China ranked fifth among the world’s top FDI investors in 2008, with FDI outflows of $44 billion in 2009 and $20 billion in the first half of 2010 (compared with $75 billion by Japan, which ranks third globally.)
Malaysia and Thailand each invested $4 billion a year abroad. As a result of sustained outward flows, net capital inflows into emerging East Asia were less than half of gross inflows at about two per cent of regional GDP in 2009.
Net capital inflows are still dwarfed by current account surpluses across East Asia. The current account surplus accounts for the bulk of foreign currency liquidity into China. In the region’s other middle-income countries,capital account deficits -- including errors and omissions flows -- in 2005-09 turned into a surplus in 2010. Portfolio flows into the region’s equities and bonds have been particularly volatile recently. In Indonesia, foreign investors purchased $2.2 billion worth of equities and $9.6 billion of government bonds in 2010, but sold $0.7 billion of the former and almost a $1 billion of the latter in January alone. In the Philippines, the range in net monthly foreign purchases of securities widened considerably. Both the largest monthly purchase and sale have more than doubled from a year earlier in 2010.
The pattern of larger and more volatile flows is also evident in Korea where purchases of government bonds by non-residents fell from $53 billion in April 2008 to $28 billion in January 2009 before rebounding to $65 billion at present.
Portfolio inflows have buoyed the region’s asset markets, but increased recent volatility is a useful reminder how quickly such inflows can reverse. As a result of large non-resident purchases of East Asian equities through most of 2010, the regional stock market index has outperformed the global index by 1.5 times and is currently at a level twice as high as its lowest point during the global financial crisis, it said.
Similarly, the report revealed that stock market capitalisation for emerging East Asia also doubled to 110 per cent of GDP in 2010 from 2003. As corporate fundamentals improved and as corporate and government issuers have taken advantage of the historically low yields to ramp up bond debt issuance, East Asia’s bond markets have responded with a bond return index that is now three times higher than its level at the beginning of 2000 and a regional return index that is one and half times the global index.
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