REVIEW & OUTLOOK ASIA
August 22, 2013, 12:46 p.m. ET
Ben Bernanke's Global Adventure
The markets show unwinding QE is not so easy.
Reuters
U.S. Federal Reserve Chairman Ben Bernanke
For a sign of the topsy-turvy world the Federal Reserve has created, look no further than the past week's global market ructions. Stock markets in Asia in particular spent most of this week in free-fall. The Indian rupee and Indonesian rupiah have plunged in value as capital floods out of both countries. Thailand and Malaysia may be next, thanks to their unfavorable trade balances and mounting debt worries.
All of this is because of good news in the U.S., traditionally Asia's largest export market whose purchases from Asian factories have driven regional growth for decades. Investors and businesses in Asia are afraid that signs of economic improvement in America—such as those signs are—could prompt the Fed to dial back the easy money policy it has maintained since the financial panic.
Only some surprisingly optimistic numbers Thursday from HSBC's HSBA.LN +0.71% forward-looking China barometer, the Purchasing Managers Index, partly stemmed the market rout. The release of the Fed's July minutes on Wednesday seemed to confirm that a bond-buying "taper" is on the way, but the fact that markets often front-run the news gives hope that this bout of volatility will subside for now.
In the longer term, however, the reallocation of capital away from emerging markets is expected to continue. Rising yields in the U.S. are attracting back capital that had fled elsewhere in search of higher rates of return. For now, that means potentially destabilizing capital outflows from economies that had benefited from investors' unusual willingness to take on higher risks for at best modest returns.
That could mean higher funding costs again become a fact of life for Asian and emerging-market governments and businesses. While this will be painful, it could also bring benefits. The re-emergence of America as a preferred investment destination will ease capital inflows that sparked both unsustainable currency appreciations and inflation and asset-price bubbles in Asia. A dose of capital scarcity might also focus developing-economy minds on truly productive investments, no small matter in countries prone to waste and corruption in the best of times but especially when money is cheap.
This week's turmoil nonetheless shows that it's a rocky road from here to there, and the market tribulations should be on American policy makers' minds. Monetary optimists have argued that, when the time comes, the Fed will be able to taper its easy money relatively smoothly. Perhaps, but a global repricing of risk in line with changing rates in America will also unsettle the very economies to which American companies increasingly turn for revenue growth.
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