Full Report - Subregional Office for East and North-East Asia - escap

ECONOMIC AND SOCIAL SURVEY OF ASIA AND THE PACIFIC 2013
Figure 1.8. Fluctuations in equities in developing Asian economies since QE3, MSCI Asia excl. Japan equities index
580
560
Day before QE3
announcement
540
520
500
480
460
440
420
6-Sep-2012
20-Sep-2012
4-Oct-2012
18-Oct-2012
MSCI index
1-Nov-2012
15-Nov-2012
29-Nov-2012
13-Dec-2012
27-Dec-2012
10-Jan-2013
Source: ESCAP, based on data from CEIC Data Company Limited. Available from http://ceicdata.com/ (accessed on 21 January 2013).
In the foreign exchange markets, on the back of
massive capital inflows in September 2012, the
Chinese yuan was pushed to its highest level since
the official and market exchange rates were unified
at the end of 1993. The progressive strengthening of
the yuan against the dollar continued into the latter
part of 2012 (see figure 1.9). Some regional currencies
also experienced rapid short-term appreciation; the
Thai baht gained about 0.57% against the United
States dollar a day after the announcement of
QE3 relative to the day before, while other regional
currencies appreciated at a slower but more steady
pace, such as the Korean won which was up
1.81% against the United States dollar a month
after the QE3 announcement compared to its level
the day before the announcement. The Korean won
appears to have experienced the most consistent
gains, appreciating more than 6% against the dollar
relative to its pre-QE3 value by mid-January 2013,
with emerging concerns that this could hurt the
price-competitiveness of local exporters.
It should be noted that exchange rate movements
are not a wholly accurate reflection of the extent of
appreciation pressure, as governments have engaged
in substantial foreign reserve accumulation (see figure
1.10) over recent years in order to dampen currency
rises. Countries are engaging in a competition to
best manage their currency values relative to their
competitors in order to protect the fortunes of their
export industries, an attempt which is especially
important at a time of reduced export demand.
This exercise, however, is extremely costly as the
resulting accumulation of foreign reserves imposes
significant costs on governments. One is the direct
cost of earning less interest income on the reserves
compared to the interest cost of the accompanying
domestic monetary sterilization, while the other is
the opportunity cost of alternative uses of such
funds for more productive investments. However, the
increase in foreign exchange reserves witnessed in
a number of countries, such as Bangladesh, is a
more positive development as such economies are
not as exposed to global financial flows, but instead
have to maintain sufficient reserves to contend
with real external sector shocks. The reserves of
Bangladesh and Nepal increased to record levels
recently, with those of Bangladesh climbing to more
than $13 billion by early 2013 while those of Nepal
crossed $5 billion in late 2012, largely on the back
of remittance inflows.
The concern with the large amount of inflows into
the region’s asset markets is the macroeconomic
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