Asian inflation: Don’t show us the money
One of the most puzzling aspects of Asia’s headlong economic growth has been the conspicuous absence of inflation. Despite net foreign exchange inflows of more than $2 trillion since 2000, money supply and credit growth have actually fallen sharply in Asia.
Where has all the money gone? Of course, part of the explanation is the success of Asia’s central banks in removing vast amounts of foreign exchange flows through sterilization. Even so, a net $700 billion has still leaked into domestic economies. And sterilization tends to push interest rates up as domestic liquidity is sucked out of the system. Again, this has not happened in Asia, where real interest rates are at historical lows.
Now Jonathan Anderson, chief economist, Asia, at UBS, has come up with an interesting explanation of this riddle: no one wants the money. In an era of what Anderson describes as "depression economics", a lack of domestic demand for imports to offset burgeoning foreign exchange flows and lacklustre domestic investment in Asia has given central banks free rein to mop up money without fuelling inflation or raising interest rates. The phenomenon is graphically evident in the stark differences between Asia’s current account surpluses, driven by export-led growth and a corresponding lack of domestic demand, and the region’s capital account balance, which has been negative every year since the financial crisis.
China and India remain the notable exceptions to this trend: both have relatively strong domestic economies and run current and capital account surpluses, albeit for different reasons.