Hot to trot

Asian IPOs: Hot money is the bugbear of policy makers in many developing economies. Just ask Brazil or, indeed, Thailand, which has just imposed a 15 percent withholding tax on interest and capital gains earned by foreign investors on Thai bonds. One worry is that booming currencies will become uncompetitive; another is that easy-come, easy-go money will make economies vulnerable to booms and busts.

But not all inflows are bad. Provided capital can be locked in at cheap rates and turned to productive use, it can even be good. One of the best ways of doing so is for companies to take advantage of the current IPO boom. If international investors want to throw money at Indian coal, Malaysian chemicals or Asian insurance, the issuers – who are often governments – would be foolish to say no. After all, money invested in an IPO can't be that easily ripped away. Sure, investors can sell their shares. But in doing so, they will be cutting off their own noses rather than those of the issuers.

Money invested in IPOs has two characteristics that make it much healthier than other types of hot money. It is equity, and it is long term. The least healthy type of hot money, by contrast, is short-term debt, especially if it is issued in a foreign currency. When that cash flows away, the borrower is left high and dry. This was the main problem of the emerging market crises of the 1990s but, fortunately, it is not a problem today.

In between the two extremes, there are ordinary portfolio flows in the secondary market - not as good as IPO money or direct foreign investment, but much better than short-term foreign currency borrowing.

Of course, even the inflow of IPO money still boosts the currencies of recipient countries. But if the capital is deployed in productive investment, at least there is a silver lining. What's more, in a few cases, notably AIA's mega listing, the money will immediately flow out again - to its parent AIG and, ultimately, the US government. In other cases, where the seller is the state, cash could even be put aside in rainy-day funds and invested in the developed world. That might seem odd. But if developing countries really think hot money from abroad is inflating their markets, it would be a profitable trade.