KUCHING: The Chinese economy has been identified as the economy most at risk and most in need of further remedial policies, according to a ‘stress index’ drawn up by ECM Libra Capital Sdn Bhd (ECM Libra).
In its research report, ECM Libra said this was reflective of its strong growth fundamentals and attractiveness as a destination for foreign capital inflows. The relatively closed state of China’s capital borders provided some degree of buffer against hot flows and sudden stops.
Nevertheless, China’s policy of gradual renminbi appreciation had resulted in a buildup of foreign exchange (FX) reserves, asset price pressures and domestic inflationary risks that were beginning to bite.
In reacting to this, China started the normalisation of its monetary policy and was expected to continue raising policy interest rates, in addition to macro prudential measures imposed in the financial and property markets.
The breadth of policy measures being undertaken over the long term was also encouraging with structural reforms to liberalise its financial system and increase capital account convertibility.
Within the Asean region, Indonesia and Thailand might encounter more strains than Malaysia and Singapore. Positive economic fundamentals and potential exchange rate and asset price appreciation had lifted net capital inflows to Indonesia and Thailand in 2010, particularly in the portfolio account.
ECM Libra said the appreciation of the Indonesian rupiah and Thai baht had been limited to 27 per cent and 14 per cent respectively as FX sterilisation boosted FX reserves by 85 per cent and 54 per cent in that order.
However, a reversal in capital flows in early 2011 had brought the risks of hot flows to the fore. In both countries, policymakers were likely to pursue interest rate hikes and gradual currency appreciation, though the latter might be more constrained by the exporter interests in Thailand.
With regards to capital controls, Bank Indonesia had imposed a one-month holding period on Indonesian government bonds last July and might pursue similar measures on other asset classes or over longer tenures if capital flows turned more volatile.
Furthermore, while heavy-handed capital restrictions remained distant, the Bank of Thailand had also imposed limited forms of capital controls and might tighten capital mobility if inflows continued to rise.
On the home front, the research firm said an early move to monetary policy normalisation and to a lesser extent in Singapore had dampened price pressures.
Capital inflows weaker than China, India and Indonesia and the lowest output gap of the economies sampled suggested that the balance of payment pressures were less critical for Malaysia.
While the Malaysian ringgit experienced the fourth highest appreciation in the sample, there remained sufficient policy flexibility to alleviate macroeconomic concerns.
Given its role as a financial centre, Singapore was unlikely to impose capital controls. This was a consideration, which could also be extended to Hong Kong, another major financial centre. Somewhat, it was likely to continue absorbing excess liquidity via currency appreciation and fiscal policy.
Policymakers would also monitor potential asset market bubbles, particularly in the property market, where ECM Libra expected further measures to curb speculative activity.