8 - Conclusions and Policy Inferences

Summary

There were three waves of private capital inflows to developing Asian countries over recent decades, as outlined in Chapter 2. The first began in the latter half of the 1980s, escalating in momentum through the early 1990s, before abruptly ending in 1997 with the onset of the Asian financial crisis. The extensive capital inflows experienced during this period could be attributed to the capital liberalization policy instigated by many regional central banks during 1990–94. In the second swell, capital inflows surged again from 2002 until the subprime mortgage crisis in late 2008, with this build up even faster than that witnessed during the early 1990s. However, the Asian financial crisis has changed the nature of local capital flows in different ways. Robust current account surpluses, for example, have been the major factor supporting foreign reserve accumulations after the Asian crisis. Net capital inflows have not been a major source of foreign exchange reserves. In addition to foreign direct investment (FDI), portfolio equity has become an important component of capital inflows, while other investment inflows have played a notably less crucial role. Capital outflows, both in terms of FDI and other forms of capital, have become increasingly important for the region. The surge of capital outflows has limited the role of financial accounts in supporting reserve accumulation. Furthermore, cross-border mergers and acquisitions have become important components of FDI. In particular, the economic recovery of developing Asia from the crisis period led to an upward trend in cross-border M&A (purchases). China; Hong Kong, China; and Singapore represent the key players in this activity.

Capital inflows in developing Asia were interrupted again in 2008 because of the current global financial crisis. So far the decline in capital flows during this period has been more dramatic than that of the Asian financial crisis. However, strong economic fundamentals in the region, especially within financial institutions, have allowed these economies to successfully redress and manage the lion's share of adverse repercussions. One key similarity that can be drawn from both the Asian and global financial crises is that FDI (both inflows and outflows) tends to be more resilient to shocks than other forms of capital flows.