ADB warns on unwinding of carry trade

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Raphael Minder, FT Syndication Service
HONG KONG: East Asia's financial markets are vulnerable to a sudden unwinding of yen-carry trades and withdrawal of the capital that has lifted many of the region's currencies, according to the Asian Development Bank.
In its latest semi-annual report, the bank warned Thursday that political and monetary authorities in the region, which last year witnessed a record $269bn in capital inflows, needed to forge ahead with measures to prepare for a sudden reversal. The bank's recommendations ranged from greater currency flexibility to a further liberalisation of capital outflows and tighter financial market supervision.
The report highlighted the recent outperformance of the Thai baht and the Filipino peso, which are up 19.5 per cent and 7.4 per cent respectively this year. The possibility of an unwinding of yen carry-trades, meanwhile, "exacerbates any volatility in emerging East Asia's financial markets." As part of the global carry trade Japanese investors have been shifting assets into other currencies to take advantage of higher interest rates elsewhere.
However, the Manila-based lender raised its projections for gross domestic product growth to 8.1 per cent this year from a 7.0 per cent prediction made in December.
The report also argued that the region was in much better shape than it was ahead of the financial crisis that hit Asia a decade ago and stressed that there is no reason at this stage to expect a sudden liquidity collapse.
Jong-Wha Lee, head of the ADB's office of regional economic integration, told a press conference that despite worldwide jitters provoked by the collapse of the US subprime market, "We do not see this trend of short-term investors withdrawing money from Asia at this point."
The bank also noted an improvement in private consumption across the region this year, particularly in South Korea, which is steadily recovering from the household debt woes that led its economy to contract in 2003. Korea's household debt reached 70 per cent of GDP in 2002.
Big discrepancies remain. Last year, the percentage of non-performing loans was 7.0 per cent in both mainland China and Indonesia versus just 0.8 per cent in South Korea and 1.1 per cent in Hong Kong.