News / Asia

Asian Banks Face Challenge of Holding Back Cash Flow

Governments in Asia are grappling with how best to keep their economies growing as capital flows increase and exchange rates rise. Economists say central banks are bracing for a flood of money as two of the world's largest economies, Japan and the United States, take new measures to stimulate their economies.

This week, Japan's central bank governor, Masaaki Shirakawa, urged advanced economies to continue to stimulate their economies. That means keeping very low interest rates and flooding markets with money to encourage bank lending and consumption.

Japan has cut interest rates to between zero and 0.1 percent and opened a $60 billion fund to buy government bonds and other assets. And the U.S. Federal Reserve indicated it could take a similar action, called quantitative easing, soon.

But economists in Asia worry about the consequences. The big risk is that investors will shift ever more money to higher-return investments in the region, driving up prices for property and stocks, says Song Seng-Wun, chief economist of CIMB bank in Singapore.

"There's going to be a lot more dollars out there, which means more money coming this way, he says. "Governments everywhere know that liquidity will go where they will find yield."

Interest rates in many Asian countries, while relatively low, are still higher than in Japan and the United States so investors make more money here. Funds that are traditionally invested in U.S. treasuries have been moving to Asian bonds. China, which has $2.6 trillion in foreign exchange reserves, nearly tripled its holdings of South Korean government bonds in the first nine months of the year.

But the inflow of capital pushes up the value of Asian currencies, making exports more expensive and jeopardizing economic output. For example, exports account for about half of South Korea's economy and the Korean won is near a five-month high against the dollar.

The yen hovers at a 15-year high despite efforts by the Bank of Japan to weaken it by buying up dollars. In Australia, a boom in commodities has lifted the Australian dollar to nearly par with the U.S. dollar. The Indonesia rupiah is at a three-year high.

Capital inflows increase volatility in the financial markets, says Jeong Young-sik, a research fellow at the Samsung Economic Research Institute in Seoul.

"This capital inflow tends to go to short-term investments and go out as profits are made," says Jeong.

Typically, central banks raise interest rates when there is a lot of money circulating in the system, which can lead to rising inflation. But in many Asian countries, higher rates would attract more funds, pushing up the value of their currencies and hurting exports.

Indonesia and Australia kept rates steady this month, as did the Bank of Korea Thursday.

Jeong says the South Korean central bank has a difficult balancing job. Consumer prices in September rose at an annual rate of 3.6 percent, near the top of its preferred inflation rate.

"(Yet) If they raise the key interest rate, the won would appreciate much more sharply," he points out.

The Korean central bank said it aims to maintain price stability while sustaining economic growth under an easy monetary policy.

The Monetary Authority of Singapore Thursday widened the trading band for the Singapore dollar, allowing greater room for adjustment to balance inflation risks and market volatility.

Song at CIMB says it is not certain the policy mix in Asia will work.

"So countries are doing that and more would be looking at that kind of management in terms of the flows. [People are] just keeping fingers crossed that all these measures would see more balanced flow, and less disruption on the exchange rates, while praying that Uncle Sam's economy will be on even keel and therefore some of the flows will return to the United States," Song says.

The Bank of Thailand will decide next Wednesday whether to raise interest rates from 1.75 percent, the lowest in Asia outside Japan. The Thai baht has strengthened 11 percent this year and Thai exporters warned of layoffs as demand for their products fall.

All of this maneuvering to keep currencies from strengthening and economies growing is sparking international fears of a currency war: a round of competing measures to weaken exchange rates. Japanese officials this week have criticized both South Korea and China for controlling their currencies' rise. And a top U.S. senator, while visiting China this week has pushed Beijing to allow its currency to rise more quickly.

You May Like

DRC Tries Mega-Farms to Feed Population

Park at Boukanga Lonzo currently has 5,000 hectares under cultivation, crops stretching as far as eye can see, and is start of ambitious large-scale agriculture plan More

Video Survivor Video Testimonies Recount Horrors of Guatemalan Genocide

During a conflict that spanned more than three decades, tens of thousands of indigenous Mayans were killed More

Video War, Drought Threaten Iraq's Marshlands

Areas are spawning ground for Gulf fisheries, a resting place for migrating wildfowl, source of livelihood for fishermen and herders who have called the marshes home for generations More

This forum has been closed.
Comments
     
There are no comments in this forum. Be first and add one

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Nobel Prize Winner Malala Talks to VOAi
X
August 31, 2015 2:17 AM
Nobel Peace Prize winner Malala Yousafzai met with VOA's Deewa service in Washington Sunday to talk about women’s rights and unveil a trailer for her new documentary. VOA's Katherine Gypson has more.
Video

Video Nobel Prize Winner Malala Talks to VOA

Nobel Peace Prize winner Malala Yousafzai met with VOA's Deewa service in Washington Sunday to talk about women’s rights and unveil a trailer for her new documentary. VOA's Katherine Gypson has more.
Video

Video War, Drought Threaten Iraq's Marshlands

Iraq's southern wetlands are in crisis. These areas are the spawning ground for Gulf fisheries, a resting place for migrating wildfowl, and source of livelihood for fishermen and herders. Faith Lapidus has more.
Video

Video Colombians Flee Venezuela as Border Crisis Escalates

Hundreds of Colombians have fled Venezuela since last week, amid an escalating border crisis between the two countries. Last week, Venezuelan President Nicolas Maduro ordered the closure of a key border crossing after smugglers injured three Venezuelan soldiers and a civilian. The president also ordered the deportation of Colombians who are in Venezuela illegally. Zlatica Hoke reports.
Video

Video Rebuilding New Orleans' Music Scene

Ten years after Hurricane Katrina inundated New Orleans, threatening to wash away its vibrant musical heritage along with its neighborhoods, the beat goes on. As Bronwyn Benito and Faith Lapidus report, a Musicians' Village is preserving the city's unique sound.
Video

Video In Russia, Auto Industry in Tailspin

Industry insiders say country relies too heavily on imports as inflation cuts too many consumers out of the market. Daniel Schearf has more from Moscow.
Video

Video Scientist Calls Use of Fetal Tissue in Medical Research Essential

An anti-abortion group responsible for secret recordings of workers at a women's health care organization claims the workers shown are offering baby parts for sale, a charge the organization strongly denies. While the selling of fetal tissue is against the law in the United States, abortion and the use of donated fetal tissue for medical research are both legal. VOA’s Julie Taboh reports.
Video

Video Next to Iran, Climate at Forefront of Obama Agenda

President Barack Obama this week announced new initiatives aimed at making it easier for Americans to access renewable energy sources such as solar and wind. Obama is not slowing down when it comes to pushing through climate change measures, an issue he says is the greatest threat to the country’s national security. VOA correspondent Aru Pande has more from the White House.
Video

Video Arctic Draws International Competition for Oil

A new geopolitical “Great Game” is underway in earth’s northernmost region, the Arctic, where Russia has claimed a large area for resource development and President Barack Obama recently approved Shell Oil Company’s test-drilling project in an area under U.S. control. Greg Flakus reports.
Video

Video Philippine Maritime Police: Chinese Fishermen a Threat to Country’s Security

China and the Philippines both claim maritime rights in the South China Sea.  That includes the right to fish in those waters. Jason Strother reports on how the Philippines is catching Chinese nationals it says are illegal poachers. He has the story from Palawan province.
Video

Video China's Spratly Island Building Said to Light Up the Night 'Like A City'

Southeast Asian countries claim China has illegally seized territory in the Spratly islands. It is especially a concern for a Philippine mayor who says Beijing is occupying parts of his municipality. Jason Strother reports from the capital of Palawan province, Puerto Princesa.
Video

Video Ages-old Ice Reveals Secrets of Climate Change

Ice caps don't just exist at the world's poles. There are also tropical ice caps, and the largest sits atop the Peruvian Andes - but it is melting, quickly, and may be gone within the next 20 years. George Putic reports scientists are now rushing to take samples to get at the valuable information about climate change locked in the ice.

VOA Blogs