Asian economies that were hit with inflation spikes and soaring currencies in the last round of US economic pump-priming are welcoming a new wave of cash as an opportunity to lift sluggish growth rates.
Washington’s 2010 drive to boost its economy by pumping funds into financial markets was greeted with dread in a region that feared the flow of “hot money” would destabilize economies and make its exports ruinously expensive.
Between January 2010 and August last year, foreign reserves rose nearly US$2 trillion, equity markets soared 21 percent and currencies gained 8.1 percent while central banks delivered 50 rate hikes, banking giant DBS said.
Yet while the US dollar sank to a record low against the yen, predictions of a currency war did not materialize as the global economy slowed, sending risk-averse investors fleeing.
The latest round of US stimulus — the QE3 quantitative easing announced six weeks ago — comes as Asian growth is weighed by the EU crisis and weakness in the US.
The US Federal Reserve’s plan to buy US$40 billion of bonds each month for the foreseeable future was followed by similar schemes in Europe and Japan.
Already there are signs the impact is being felt, with cash again flooding developing economies such as Indonesia and the Philippines.
A new currency surge looks on the cards with the Hong Kong Monetary Authority, the city’s de facto central bank, last week intervening four times to curb the local dollar’s rise against the greenback.
Hong Kong shares have surged 10 percent since QE3 was announced and the banking authority has said it expects more inflows as foreign cash seeks better returns.
Vast amounts of cash flowing into an economy are an indication of confidence, but also lead currencies to surge, fueling inflation and making exports more expensive.
However, despite the turbulence, most analysts view QE3 positively at a time of economic uncertainty.
Rajiv Biswas, Asia-Pacific chief economist at IHS Global Insight, told reporters that with exports suffering, “QE3 is supporting Asian growth by underpinning the US recovery and maintaining US demand for Asian exports.”
BBVA Research said that unlike in 2010 when Asia was overheating, the new round comes as growth is weak and asset prices soft.
Capital inflows should lead to “an increase in investment and domestic demand” and “help drive asset prices higher, which will result in positive secondary effects on Asian economies.”
The cash has introduced liquidity into regional markets — Thailand shares are up 25 percent this year, the Philippines market is 24 percent higher, Singapore has risen 15 percent and Mumbai’s SENSEX has surged 20 percent.
China has said it is “highly concerned” about QE3, but has taken a softer tone than in 2010 when it said Washington was risking the global recovery in its search for growth.
The consensus in Asia is upbeat as the Fed’s bond buying kicks in.
Indonesia saw a net inflow of about US$1.3 billion in bonds in September, compared with a net outflow of US$540 million in August, Standard Chartered bank said.
Seoul also saw net inflows of US$1.4 billion in September, versus US$2.4 billion in outflows the month before, the bank said, while the won is up about 3 percent.
With world growth tipped to come in lower than earlier forecasts, fears over inflation have taken a back seat to economic growth.
The Philippine Central Bank last week cut rates by 25 basis points.
In Malaysia, Alliance Investment Bank chief economist Manokaran Mottain said he did not expect a rise in the ringgit to lead to higher prices for “the man on the street.”
DBS said in a report that the underlying notion that the Fed funds rushed straight to Asia was wrong.
“Eighty percent or more of the money the Fed has ‘injected’ into the economy has stayed right there at the Fed in the form of excess reserves,” it said.
The money that flowed into Asia after QE2 “came from investors taking comfort in the Fed policies and putting ‘more risk on the table.’ Other things equal, one might expect that again now,” it said.