Tashkent: Capital inflows into Asia will not be significantly affected by European debt woes due to the region’s high and widening interest rate differentials, the Asian Development Bank’s (ADB) chief economist said on Saturday.
Asia’s economies have been recovering much faster than the rest of the world from the global crisis, resulting in interest rates in the region rising faster than elsewhere, providing better investment returns without any increase in risk, he said.
“It’s true that the risk aversion is growing, but capital flows into Asia will not be significantly affected unless the European banking system as a whole gets hit,” Jong-Wha Lee of the Manila-based multinational lender told Reuters in an interview.
Concerns about fiscal problems in Greece and several other euro-zone economies have rattled global financial markets since late last year, sparking concerns of a repeat of massive capital flight out of Asian emerging markets.
“Asian economies are growing fast and interest rate differentials (with the rest of the world) are big and will get bigger, and so, I don’t think there will be a serious impact on capital flows,” he said on the sidelines of the ADB’s annual meetings in Tashkent.
He said Japan and a few other fiscally weak economies in the region may come under closer scrutiny from investors, but high domestic savings and stronger current account positions kept them in better shape than the southern European economies.
“In the case of Greece, they have no such thing as local-currency bonds and much of their bonds are owned by foreign investors, whereas in Japan, it issued a big amount of local currency bonds and domestic households own much of them,” he said.
On China’s foreign exchange policy, Lee repeated the ADB’s stance that it is in China’s interest to end the yuan’s peg to the US dollar and to allow the currency trade in a broader band.
“The biggest risk (from keeping the peg for a long time) is the increasing pressures on the domestic inflation and asset price growth because no country can completely sterilise capital inflows,” he said.