Monetary policy easing in the G3 countries may lead to excessive credit growth and the creation of asset bubbles in East Asia and Pacific (EAP) as investors flock to the region, the World Bank warned Wednesday.
In their East Asia and Pacific Economic Update, the World Bank said recent central bank easing in Japan, the US and the eurozone may redirect capital to the EAP, which could cause more harm than good for the region.
"Recent announcements by central banks in the G3 have renewed concerns regarding the possibility of excessive capital inflows into the region," the report warned.
The money deluge "could render exchange rates uncompetitive, lead to asset price bubbles and excessive credit growth, raise the risk of future sudden outflows, or lead to costly sterilization measures from monetary authorities."
"At high risk are countries that experienced rapid credit expansion, especially if the credit to GDP ratio is already high, and those with weak financial sector supervision," the report added without citing specific countries.
Central banks in the US, eurozone and Japan had in recent months implemented easing measures such as reducing interest rates and boosting money supply to kickstart their flagging economies.
But investors turned off by the measures have cast their eyes towards the developing economies in Asia, lured by factors such as strong domestic demand and economic resilience despite global financial fragility.
The World Bank also sang praises for the EAP in its latest report, stating that the region "remained resilient amidst a lackluster and, at times, volatile external environment".
Raising its 2013 growth forecast for the EAP to 7.9 percent from 7.6 percent previously, the World Bank stated that "growth in EAP is still the highest of any developing region and constitutes almost 40 percent of global growth."
"For 2013, we expect the region to benefit from continued strong domestic demand and a mild global recovery that would nudge the contribution of net exports to growth back into positive territory, a trend projected to continue into 2014."
China was projected to lead EAP growth in 2013, with the World Bank predicting 8.4 percent growth for Asia's largest economy due to "this year's monetary easing, local fiscal stimulus and more rapid approval of large investment projects".