"While capital market flows are bound to be volatile, Fitch doubts the proposition of 'Asia decoupling' and believes the sensitive capital market flows could be the forerunner to FDI and loan flows," says Franklin Poon, Director in the agency's Sovereigns group.
Fitch keeps track of four types of capital inflows that have high data frequency: net FDI inflows, net foreign purchases into local equity markets, international banks' external positions in individual countries, and international issuances of debt securities. The agency believes the four data series should provide a general picture of net capital inflows into the region.
There is no sign that net FDI inflows to the region started weakening in Q108. Among capital importers in the region, the major support came from China, India and Singapore, while net FDI inflows have remained stable for Mongolia, Thailand, Indonesia and the Philippines. For capital exporters of Hong Kong, Korea, Malaysia and Taiwan, net FDI outflows have not shown any clear deteriorating signs.
On the other hand, foreign funds have clearly reduced exposure to local equity markets. For the first six months of the year, foreign net selling amounted to USD13.7bn, the worst recording since the data series became available in June 2001. Outflows have been larger when compared to 2001 with the bursting of the tech bubble and in 2003 with the outbreak of the SARS epidemic. The biggest withdrawal took place in Taiwan, due to its relatively big market capitalisation and its heavy bias towards to the electronics sector.
With regards to net international inter-bank debt, Asia continues to have a net asset position against international banks. Credit risks have remained under control with a continued rise in the region's overseas assets on the back of the accumulation of official foreign reserves. This is in contrast to the pre-1997 situation, when international banks' claims on Asia were higher than their liabilities. At the same time, international banks have continued expanding their exposure to Asia. In Q108, the region actually witnessed net inflows of international inter-bank debt. Fitch raises particular concerns over India and Korea as both countries' rapid build-up of net international inter-bank debt has not been matched by their deposits at international banks.
Net international issuances of debt securities dropped significantly in Q108; total net issues declined by 47% to USD5bn on the year. The most severe declines were recorded in Hong Kong and Singapore. They are the region's financial hubs and thus more sensitive to recent global capital market developments. Significant declines were also recorded in Malaysia, Thailand and India.
