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| Yim Jong-ryong, vice finance minister, delivers a congratulatory speech at an Asian Development Bank conference titled "Capital Flows to Asia" held at a Seoul hotel on May 18. | ||
Emerging Asian economies should guard against volatile capital inflows because they could render the region's financial system unstable, a report from the Asian Development Bank (ADB) warned Tuesday.
Asia's strong economic recovery and improved risk appetites have resulted in a surge in foreign fund inflows into the region, a shift from the massive outflow seen at the height of the global financial turmoil, the Manila, Philippines-based bank said in its annual Asia Capital Markets Monitor report released in Seoul.
The bank said the rapid growth of capital inflows would pose a challenge to Asian recipients since sudden outflows of those funds in the short-term could force Asian countries to confront financial market turmoil.
"While the return of capital inflows is welcome, surges in short-term capital inflows could destabilize financial markets and pose a risk to stability," noted the ADB, which is dedicated to regional growth and poverty reduction.
South Korea's financial market came to the brink of collapse last year as the flight of short-term funds and a freeze in the global credit market left banks struggling to refinance their maturing foreign debts on the back of dried-up dollar borrowing.
The abrupt foreign capital outflows could trigger downward pressure on Asian currencies and falls in asset prices, the ADB said, urging Asian economies to consider capital controls to limit potential outbound movement of short-term money, mostly speculative equity funds coming in the form of short-term investments.
"Asian authorities should consider the full array of policy measures available in their toolkit to manage a surge in capital inflows," ADB said in the report.
However, capital controls are only effective when capital inflows are transitory and they are unduly causing a local currency to spiral up, the bank said, noting the measures have no effect when implemented over a long period.
/Yonhap News
reporter
Park Sae-jin
swatchsjp@ajunews.com