Little outflow from Asia despite tapering fears

Fears in Asian financial markets of what the US Federal Reserve might do may have been greatly exaggerated, judging by how little foreign investment that entered Asia during the past four years has left so far in anticipation of tighter US monetary policy, data shows.

Government bonds, currencies, and equities in Asia have been sold-off since April after the Fed signalled it would soon cut back its bond-buying programme, effectively beginning a tightening in its nearly five-year super-easy monetary settings.

Yet, despite a bloodbath in emerging markets in June that sent stock markets in Asia to multiyear troughs and currencies such as the Indian rupee to record lows, both the anecdotal evidence and the data suggest very little money has left Asia.

Going purely by foreign exchange reserves data, emerging Asia's top-10 economies, from China to the Philippines, received inflows worth US$2.1 trillion between November 2008 and April 2013, the period when the Fed pumped massive amounts of cheap money into markets. Since April, about US$86 billion, or just 4 per cent of that cash, has left Asia, with about half of those outflows from China.

Other independent measures of capital flows point toward the same conclusion. Deutsche Bank estimates that foreign investors withdrew roughly US$19 billion from Asian local currency debt markets between June and August. Despite that, net flows for the year are a positive US$5 billion and the outflows pale when compared with inflows of US$203 billion since early 2009.

"Ten years of large capital flows into emerging markets cannot be unwound in 10 weeks," said Stephen Jen, co-founder of London-based investment firm SLJ Macro Partners.

Jen reckons that because emerging market assets were treated as safer than vulnerable developed markets during the years of easy money, any meaningful recovery in those developed markets would lead to more outflows from emerging markets.