DEBT MA RKE TS

One area of concern is debt markets.

While vastly improved since the 1990s, Asia still hasn’t built the deep, liquid bond arenas needed to stabilise growth. It means that lots of the capital flowing Asia’s way will end up in stocks and property. In a perfect world, investors would move into bonds as asset prices get frothy.

The lack of dynamic secondary debt markets means many may just leave Asia, as opposed to diversifying into the region’s fixed-income investments. It makes Asia more volatile than it should be this year.

Capital controls could help ameliorate the problem.

One way to go is to implement “targeted controls”, says Mr Masahiro Kawai, head of the Tokyo-based Asian Development Bank Institute.

He points to Brazil as an example. Last year, Brazil implemented a tax on foreign purchases of stocks and fixed-income investment in a bid to stem the currency’s advance. Markets took the step much better than Thailand’s 2006 moves, which sent stocks plunging.

A point lost on few is that China and India, which have more conservative regulations than the West, weathered the crisis.

With the Group of 20 nations dragging their feet on crafting a safer international financial system, governments will feel pressed to do what they can to tame markets.

Unlike in 1996, Asia knows a tsunami of cash is coming its way and that it comes with risks. Carefully employed, capital controls could siphon some of the heat from

Asia’s latest hot-money challenge.

Free-market champions are unlikely to concede that any curbs on money flows are appropriate.

Smart people can, and will, debate this issue. It’s inevitable, though, and the sooner markets learn to live with it, the better.