Asia: Capital Flows

Background:

Diminishing risk-aversion among global investors has led to continuous foreign institutional investor (FII) inflows to Asia since March 2009, noticeably in South Korea, India and Taiwan. Foreign direct investment (FDI) inflows have started to improve on the back of robust economic recovery and aggressive fiscal stimulus in the region. Also, the banking sector remains relatively resilient fundamentally and tight external bank borrowings has been eased thanks to government supports. However, downside risks remain. Worse-than-expected macroeconomic data and greater-than-expected impact of global slowdown on the regional economies, return of risk aversion and bleak corporate earning outlook may reverse the pattern. Risk of rating downgrades and unattractive yields may pose risks to debt inflows. And, central banks' depreciation bias to support exports and to build FX reserves may further deter capital inflows into the region.