The theme of Asian decoupling is as old as the hills. For years, economists and analysts have argued over whether or not Asia is a sufficiently powerful and independent economic bloc to be able to come through the macro shocks relatively unscathed. It is always hoped for, but never quite achieved. With Europe in crisis and the US flirting with recession and unresolved debt, the question is being asked again. The simple truth is that, no matter how much more robust Asian economies look than those in the west, regardless of how much better their fiscal positions and demographics, capital continues to fly from these places whenever there are global (or western) worries. Illogical though it may be, Asian capital markets remain a risk-on bet. “We saw trickles in September, but the risk is we may start to see serious net capital outflows from Asia, which can be very destabilising,” said Rob Subbaraman, Nomura’s chief Asia economist. A look at capital flows over the last five years is illuminating. According to Subbaraman, in the 10 quarters before the global financial crisis from the first quarter of 2006 to the second of 2008, Asia ex-Japan attracted US$265bn of net capital inflows – a broad measure, including net portfolio debt and equity, FDI, international bank lending and balance of payments. In the following two quarters, in the eye of the credit crisis, US$118bn departed. “A reasonable chunk left,” he said. “However, what’s interesting is that in the next 10 quarters, from the first quarter of 2009 to the second quarter of 2011, net capital inflows totalled US$684bn.” “We saw trickles in September, but the risk is we may start to see serious net capital outflows from Asia, which can be very destabilising.” That vast increase has been down to Asia’s better fundamentals relative to the rest of the world, the higher interest rates available, and the easing policies in advanced economies that pushed capital towards Asia. Still, should we expect, as happened last time, for half of it to leave again when things turn sour? “There is a lot of room for foreign capital to leave Asia if we start to move towards anything starting to resemble the global financial crisis,” Subbaraman said. This is a more alarming prospect in some markets than others. Indonesia, in particular, has been watching closely for signs of capital flight, since, at its peak, foreigners accounted for 35% of all rupiah government bonds, with a similarly high representation in the stock market. “We have the capacity to withstand reversals,” said Rahmat Waluyanto, in the debt management office of Indonesia’s Ministry of Finance. “We have relatively large forex reserves, a widening domestic investor base, and a bond stabilisation framework.” However, money is leaving. The rupiah, having gained more than 5% against the US dollar in the first eight months of 2011, has slid by more than 6% since the start of September as overseas investors sold stocks and bonds. Foreign ownership of government bonds fell 1.1% in a single week in late November. Indonesia is a market darling: a domestic consumption story, a model new democracy, a fiscally sound nation and one capable of borrowing US$1bn of seven-year money at just 4% in November at a time when Italy was paying almost 7% on its own debt. A move up to investment-grade status within the next six months is considered a formality. However, none of that is enough to stop foreign capital leaving when there are difficulties in Europe and the US. “The Global Financial Crisis Part II is spreading to Asia a little faster than we had anticipated,” said John Woods, Citi Private Bank’s chief investment officer for Asia Pacific. Speaking on November 22, he noted that every currency and every equity market in Asia had declined month to date, with India, Australia, Korea and Taiwan hardest hit. According to Woods, this is partly a function of weak levels of risk appetite, and partly capital outflows as continental European banks reduce their