In a new report, the Asian Development Bank says financial and economic authorities in East Asia face a serious challenge in managing high capital inflows. VOA's Heda Bayron reports from Hong Kong.
Asian countries are flush with cash. The Asian Development Bank says $270 billion in foreign capital flowed into the region last year alone, in the form of investment, trade revenues and remittances. A major portion of the money has gone to China.
In a report released Thursday, the ADB says this huge amount of foreign capital could potentially destabilize economies and financial markets.
There is a danger that large amounts of this money could suddenly be sent back out of Asia in times of economic uncertainty. The Asian financial crisis of 1997 was partly triggered by a sudden, massive, capital outflow.
Lee Jong-hwa heads the ADB's regional economic integration office.
"Capital inflows increased much higher than the level before the crisis of 1997. Capital inflow is much more focused on portfolio investments, so that means capital inflow has [a] direct impact on the stock market. We see increased capital outflows too," said Lee. "This means more volatility in Asia."
Moreover, high capital inflows have led Asian currencies to appreciate in value, which has made Asian exports more expensive in their major markets.
Asia's accumulation of large trade surpluses and foreign exchange reserves has resulted in a global financial imbalance, where Asia holds a lot of cash while the West - in particular the United States - is experiencing deficits.
The U.S. and the European Union argue that one way to narrow the gap is for Asian countries to stop manipulating their exchange rates at levels that allow them to sell products to the West artificially cheaply.
The ADB report urged Asian countries to loosen restrictions on capital outflows in order to correct the imbalance. China, which has trillions of dollars in foreign exchange reserves, has eased limitations on domestic companies investing overseas, and state-owned companies made several high-profile foreign acquisitions in recent months.
In May, the Chinese government bought a $3 billion stake in the U.S. private equity company Blackstone. Earlier this week, the Chinese and Singapore governments agreed to invest about $18 billion in British bank Barclays.
The ADB's Lee Jong-hwa says how China manages its foreign currency reserves is especially important for the world economy.
"How to manage Chinese accumulated international reserves is very important issue not only for
China but also for the world," he said. "I think…the overseas investment is in the right direction."
The report says that overall, Asian economies are expected to post solid economic growth for the rest of the year, and predicts an average expansion of 8.1 percent.