Asia After the Money Flood; It’s time to prepare for the end of U.S. quantitative easing

Updated July 16, 2013, 6:59 p.m. ET

Asia After the Money Flood

It’s time to prepare for the end of U.S. quantitative easing.

Investors have awakened to the implications for Asia of a gradual unwinding of easy money policies in the West. Witness last month’s cash exodus and stock-market declines as investors re-evaluate their appetite for risk. Higher yields in America are expected to draw portfolio investment back from emerging markets.

The upshot is that Asian leaders accustomed to reaping the growth rewards of plentiful foreign capital are in for a shock. The investors who remain committed to the region will look for those countries that offer the most attractive mix of risk and return. It’s time to revisit economic reforms that will keep them hooked.Policy makers are clearly worried by the capital outflows. On Monday evening, India’s central bank took steps to tighten liquidity in the banking system in an effort to drum up demand for the rupee, which has been falling against the dollar for more than a month. Jakarta last week surprised with a 0.5 percentage point increase in its policy rate in part to woo back foreign investors who had pulled $4 billion out of Indonesia in June. Currencies such as the Malaysian ringgit and the Thai baht have fallen dramatically against the dollar in the same period.

In some ways this is a blessing, as it represents a return to the status quo ante quantitative easing. Inflows exceeded the productive uses for the capital, and so tended to fuel credit- and asset-price bubbles. Central bankers struggled to contain the inflationary pressure since interest-rate increases would only make their markets more attractive for foreign capital.

Asian economies will eventually benefit from more normal risk pricing, but the eventual end of U.S. quantitative easing will create challenges. In particular, as Indonesia and India show, central bankers may need to increase interest rates to stabilize their exchange rates amid a rapid departure of foreign capital, but they will be doing so amid slower domestic growth. Meanwhile, as Frederic Neumann of HSBC writes nearby, Asian leaders can no longer depend on exports to the U.S. to fuel their economies despite the recovery in America.

The task for Asian leaders, then, is to open up new opportunities for investments that produce sufficient returns to warrant the allocation of scarcer, more expensive capital. As an economic matter this shouldn’t be hard. Developing Asia still boasts positive demographics, eager workforces, a large base of potential consumers, and plenty of scope for investment that can stimulate high growth rates. But as is so often the case, the politics will be harder.

Indian leaders are on the right track with ideas floated in recent weeks to liberalize rules on both portfolio and direct investment to make the economy more hospitable to foreigners. Industries such as retail offer enormous potential for productivity enhancements and growth that will entice investors in a scarce-capital world. Yet New Delhi has so far been unable to overcome entrenched opposition to such opening, and retail may not be included in the liberalization proposal if that plan appears this month. Such omissions will become more costly as capital becomes more expensive.

Kuala Lumpur might consider whether Malaysia’s long-standing system of hiring preferences for ethnic Malays will obstruct the productivity gains the economy will have to produce to keep up with its new cost of capital. Jakarta has made progress with some reforms such as a gradual lifting of fuel subsidies, but in other regards is becoming more hostile to foreign investors in industries such as mining.

All of this is arising before the Fed’s tapering has even begun, and investors may for now be pulling ahead of where Chairman Ben Bernanke will be willing to lead later this year. In that respect, recent capital flows out of Asia can be viewed more as a warning than as a new reality. But it’s a warning policy makers should heed while they have time to prepare their economies for a post-QE world.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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