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Funds Out of Asia? We See Capital Coming In: ADB

Friday, 5 Jul 2013 | 2:28 AM ET
Capital Flows Into Asian Economies Strong: ADB
Lei Lei Song, Senior Economist at Asian Development Bank says there hasn't been sudden stops or reversals in capital inflows in the region despite Fed tapering fears.

There have been concerns over fund outflows from Asia's emerging markets on the possibility of the U.S. easing back on monetary stimulus, but the Asian Development Bank (ADB) says capital is actually flowing into the region.

Lei Lei Song, senior economist at ADB, told CNBC that there has been no sudden reversal of capital despite swings in investors' risk perception.

"I believe capital flows into emerging economies, in particular in Asia such as Asean (Association of Southeast Asian Nations), would continue to be strong because we have very strong fundamentals," Song told CNBC Asia's "Cash Flow" on Friday.

(Read More: Asia's Fight to Stem Fund Outflows Just Starting)

While Song admits that some countries will experience the flight of capital in the short-term, he believes that Southeast Asia, in particular, will fare better than the rest in the current economic conditions.

"If you look at the Asean economies as a whole, and if you look at the economic growth in the past few years, Asean is possibly the most stable region in the world," Song said.

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Indonesia, the Strongest?

He added that countries like Indonesia, Southeast Asia's largest economy, which has been flagged by economists as being particularly vulnerable to fluctuations in capital flows, has been growing above 6 percent for the past 2-3 years.

"It (economic growth) was only falling a little bit in the global financial crisis - although Indonesia's rupiah was always under pressure," Song said. "I think Indonesia has already done some very significant steps such as unwinding fuel subsidies, which would help their fiscal management and the rupiah."

In June, Indonesia was the first Asian central bank since 2011 to hike interest rates by 25 basis points to 6 percent as a pre-emptive strike against inflation as the local currency weakened.

(Read More: Rate Hike a Pre-Emptive Strike: Indonesia Official)

Emerging market currencies, equities and bonds have dropped since early May as speculation grew about when the U.S. Federal Reserve would start to pull back on its monthly $85 billion bond-buying program, which has pumped extra liquidity into the region's financial markets.

Last week, data from fund tracker EPFR Global showed investors pulled out a record $10 billion from emerging markets debt and equity funds, Reuters reported.

But after the recent sell-off, there have been reports this week that some investors are dipping their toes back into emerging markets because of the cheap valuations. Citi, for example, recommended that investors regain exposure to stocks on the MSCI Emerging Markets Index, which now has a price to earnings ratio below 10 - levels unseen this year.

(Read More: Emerging Market Stocks at Their Cheapest This Year: Citi)

ANZ Research, meanwhile, reported that their ex-Japan Asia-Pacific equity funds finally saw $600 million in inflows in the week to Wednesday after five consecutive weeks of outflows.

China, Not a Drag

Song said added concerns that a hard landing in China is the biggest risk to Asia's emerging markets, already suffering from low asset allocations, maybe overdone as well.

"There are some risks, because we have seen liquidity squeeze in the interbank market recently, but I don't think there would be huge downside risk to the Chinese economy," Song said. "It is rebalancing... when you go through structural adjustment you will see a slowdown in economic growth, but there's no collapse."

What's happening in China is based on very gradual and deliberate policy steps to adjust the Chinese economic structure, Song said, adding that the reforms will have a "very positive impact on Chinese economy in the medium-term."

Several major banks and international agencies have downgraded China's economic growth forecast in the past month, citing the government's tolerance for slower growth amid implementing structural reforms. Nomura is going as far as to predict that growth may fall below 7 percent in the second half of the year. China's economy grew at its slowest pace for 13 years in 2012.

- By CNBC.com's Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu

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