Capital Flows in East Asia Since the 1997 Crisis

Abstract

In recent years, investors have increasingly delegated the management of their investment portfolios to institutional asset managers. The scale of such delegated investing and its development over time are apparent from the growth in the size of assets under management by different types of institutional investors across various countries. Moreover, demographic trends can be expected to sustain the industry’s growth well into the future.

This special feature first reviews the net flows of capital from East Asia to the rest of the world. It then turns to the gross flows of capital, highlighting the region’s import of higher-risk capital and export of safer capital. In a third section, the criticisms that have been leveled against these patterns of capital flows are considered. The role of gross capital flows in some of the recent rapid increases in official foreign exchange reserves is emphasized.

Finally, this special feature discusses policies to address the possible shortcomings in the current pattern of capital flows. These include East Asia’s finishing the restructuring of its banking and corporate sectors, developing both long-term investing institutions and bond markets, and relying less on exports to lead economic growth. A constructive response to these challenges would permit the global economy to move towards a more sustainable pattern of current account surpluses and deficits and associated capital flows.