Essay On The Composition Of Capital Inflows

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In figure 3, Cho and Rhee (2014) show the composition of capital flows for all 10 Asian Countries excluding Hong Kong and Singapore. While the FDI was quiet stable, the portfolio investment part decreased from 2.2% of GDP in 2007 to -2.9% in 2008. Also, the other investment part of capital inflows, like bank loans, declined since 2007; nevertheless, it rebounded over than the pre-crisis level and became the major source of capital inflows after GFC. Cho and Rhee (2014) explain the composition of capital inflows by individual country in figure 4. It is easily to notice that both financial hubs, Hong Kong and Singapore, have more than 10% of GDP which was led by other investment part. In terms of two G2 countries, Japan and People’s Republic…show more content…
Increasing money impacts Asian economy on capital flows and on either exchange rates or housing prices significantly. The result of this section is quiet interesting. The QE of US brought huge capital inflows into Asian economies. There are two ways that it can influence: 1) a large amount money flows into the emerging markets to buy their currencies which investors expected they would increase values relative to USD; then, the expectation caused the appreciation of currencies. 2) however, if the central banks of some certain economies try to stabilize their exchange rates not to appreciate, the effect of QE would show in the housing markets, the most important household assets in most Asian countries. In real terms, Cho and Rhee (2014) indicates in the figure 5 that the housing prices nearly double in Hong Kong and India since the fourth quarter in 2008 to 2012. Also, in Taiwan, the housing prices rose by almost 60%. In Malaysia, it increased by around 30%. Economies with stable or rigid exchanges suffer from large increasing in the housing prices. Figure 6, calculated by Cho and Rhee (2014), demonstrates the relationship between exchange rates and housing prices. From the figure 6, it is obvious that Japan is an outlier. As a result, we show two situations in the figure 6, with and without Japan. Including Japan in the calculation, the correlation coefficient between exchange rates and housing prices is -o.84.
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