World Bank expects China's economic growth to bounce back to 8.4 pct in 2013 (4)

CAPITAL INFLOWS

The report also discussed the growing concern that the renewed monetary expansion in the G-3 economies, namely the United States, Eurozone and Japan, could trigger a flood of capital inflows that could lead to asset bubbles and excessive credit growth.

Monetary easing in advanced countries need not lead to more capital inflows into East Asia and the Pacific. The first round of quantitative easing by the United States did lead to capital inflows into Asia but the second round did not.

The report said that while the bulk of the capital flowing into the region consists of foreign direct investments, which create jobs and drive growth in the production capacity, authorities should close monitor the developments in their capital accounts.

It is a risk if the capital inflows surge above what can be absorbed in productive investments. Even productive investments can set off a spiral by boosting the outlook of the economy, said the report.

"Appropriate exchange rate arrangements and capital market development could provide a cushion against undesirable effects of capital inflows, while macro-prudential measures could guard against excessive credit growth," he said.

The report said that the capital inflows resumed in the second half of 2012, most notable in countries like Thailand and Indonesia. Nevertheless, they were still below the level of capital inflows in 2011.