How bond financing can help Asia grow

The US Federal Reserve's announcement of a delay to the start of a slowdown in asset purchases gives Asia's markets a bit of a reprieve but does not change the basic picture that the US is embarking on a gradual normalisation of its monetary policy.

The big question is whether that normalisation will keep driving investors out of Asia's markets, further taking the wind out of the region's economic sails and all but wrecking the most vulnerable economies, as happened in 1997 during the Asian financial crisis.

The quick answer is "no". A repeat of the 1997 crisis, when investors fled in droves and economies tanked, is not on the cards; foreign exchange reserves are healthier, currencies are more flexible, foreign debt is lower, most economies maintain current account surpluses and most nations have room for monetary and fiscal adjustment.

However, there are certainly risks ahead and markets and economies need to work now to brace themselves for a period of higher borrowing costs, some market volatility and slower economic expansion. Even before the latest market turmoil, growth was already slowing, particularly in China.

As quantitative easing begins to subside, it will be harder and more expensive for firms and governments to raise funds, especially in foreign currencies. And that will pinch a region desperate to boost investment, particularly in the infrastructure needed for growth.

Asia has a huge cache of foreign reserves but they have been invested more in foreign markets like the US than in emerging Asia. The key is how to mobilise these funds for the longer-term investments that power growth. Government stimulus spending kept the region's economies chugging along after the global economic crisis; now, the baton must be passed to the private sector.