Providential downpour

After the financial crisis, flighty foreign portfolio investors were the bane of Asia’s central bankers. But now the hot money is helping the authorities out.

When cash can easily cross national borders, monetary policy often has unintended consequences. For example, investors will take the cheap money offered by the domestic central bank and inject it into more promising foreign markets. The leakage reduced the effectiveness of the US Federal Reserve’s effort to push up economic growth through “quantitative easing”.

That was frustrating for the Fed, and a source of considerable aggravation for policymakers in the recipient nations in Asia. The flow of Fed-made funds into commodity markets and into their countries pushed up inflation, but the higher they raised rates to reduce demand, the more profitable it became to invest cheaply borrowed dollars into their economies. Monetary policy was turned on its head. Indonesia and South Korea stopped raising rates and Turkey actually cut.

Flighty investors took flight from Asia when quantitative easing ended a year ago. European lenders, thinking they would need their money at home if the euro collapsed, pulled $136 billion in credit out of Asia, pushing up borrowing costs across the region. Asian central bankers could only stand by and watch.

Now, the hot money holders have mixed feelings. Slower growth has led to a retreat from equities – foreign sales of at least $9.5 billion in Asian stocks since April. But bond investors are attracted by the relatively high yield on Asian paper. The Philippine government’s cost of borrowing has fallen from 5.8 to a little above five percent in the past three months. Asian corporate borrowing costs have fallen similarly, prompting companies to sell a record $379 billion in bonds in the first half of this year.

That’s good news for Asian central bankers. Investors from developed markets, where yields are minimal, will hardly be deterred by growth-stimulating rate cuts. Monetary policy can once again do what it is supposed to in tough times – stimulate lending.