A delegate takes pictures of Association of Southeast Asian Nations (ASEAN) leaders posing for a group photo with China's, Japan's and South Korea's prime ministers during the 13th ASEAN Plus Three Summit on the sidelines of the 17th ASEAN Summit in Hanoi Ocrober 29, 2010. – AFP Photo

HANOI: Developing Asian nations must carefully manage a massive inflow of foreign capital and avoid remedies that could create destabilising “distortions”, the Asian Development Bank chief warned Saturday.

Haruhiko Kuroda told Asian leaders at a summit in the Vietnamese capital Hanoi that capital flows are one of two risks that regional economies face as they rebound from the last global downturn.

His comments came shortly before the US Federal Reserve is expected to announce it will go into a second round of quantitative easing, injecting more money into the banking system to further stimulate the world’s biggest economy.

The first risk is if the recovery in the developed economies falters, Kuroda told presidents and prime ministers as well as US Secretary of State Hillary Clinton and the Russian foreign minister.

“The second risk is capital flows, which could complicate macroeconomic management,” Kuroda said in a prepared speech made available to journalists.

“We must be prepared,” he said.

Referring to Asian economies outpacing growth in the developed world, Kuroda said “faster growth and higher yields can draw excessive — and potentially    volatile — capital flows into the region”.

“Authorities are watching asset prices and exchange rates carefully, with several beginning to use well-targeted capital controls to limit speculation,” he said.

“Care must be taken, however, not to create distortions.” Hammered by the financial turmoil that began in 2008, the United States, Japan and Europe are moving to weaken or cap their currencies in a bid to make their exports more competitive in the global market.

They have also also injected more money into their banking systems to stimulate growth.
But because growth in the developed world is anemic and unemployment high, a large chunk of the money is heading to emerging markets, including in Asia, where it stands to gain better yields.

According to the Washington-based Institute of International Finance, net private capital flows to emerging economies are projected to reach 825 billion dollars this year, or over two billion dollars a day, up from 581 billion dollars in 2009.

The massive inflow has been a key factor pushing Asian currencies higher, which have made their exports more expensive on the global market.

It has also led to steep gains in stocks and property prices, stoking fears of “bubbles” which could later burst if the money is withdrawn quickly and prompted individual central banks to impose capital controls and other measures to cool down their markets. – AFP