Tide of capital flows to emerging markets may spur correction

The rush of private capital flows into emerging markets last year may increase the likelihood of a market correction this year, according to the Institute for International Finance, a global association of financial institutions.

In a strongly worded statement, the institute's managing director, Charles Dallara, warned that the surge of portfolio equity investment, bond market flows and commercial bank lending to emerging markets might have stimulated asset prices to increase 'too far, too fast'.

'We believe the markets are much more vulnerable to potential crises than they have been in the recent past,' Mr Dallara said.

Emerging markets received net capital inflows of US$187 billion last year, compared with US$124 billion in 2002, according to the institute, membership of which encompasses more than 320 financial bodies.

Asia accounted for about US$111 billion, or 60 per cent, of net inflows. At country level, China dominated its Asian neighbours, receiving $55.7 billion last year.

An improvement in emerging markets' underlying macroeconomic fundamentals, political reforms, low interest rates and attractive yields on emerging market assets versus those of developed markets helped bolster the investment surge, the institute said.