The issues concerning non-foreign direct investment (non-FDI) capital flows, i.e., portfolios (both equity and debt securities) and other investments, including bank loans, in developing Asia are not new and, indeed, received considerable attention during the Asian financial crisis. The reversal of capital inflows, which went hand-in-hand with a massive depreciation in exchange rates and a significant contraction in economic growth, resulting in doubts regarding the determinants and benefits of cross-border non-FDI capital flows (e.g. Kose et al. 2006; Wei 2006). Figure 5.1 shows that these inflows to developing Asian countries began in the latter half of the 1980s and accelerated with the onset of the 1990s. The contribution of other investment, especially bank loans, and portfolio investment in total capital inflows increased noticeably during this period. The share of bank loans jumped to 12 per cent in 1995 from less than 1 per cent in 1990, while that of portfolio investment increased from 1.5 per cent to 16 per cent during the same period. However, the Asian financial crisis interrupted non- FDI capital inflows into developing Asian countries. Portfolio inflows and other investments declined substantially during 1998–2002 and the latter actually registered a negative value during this period. Note that during the Asian crisis, capital outflows remained relatively flat. The squeezed market size resulting from the financial crisis resulted in a slowdown in capital outflows.

Issues related to non-FDI capital flows received attention once again when the current global financial crisis caused pullbacks in capital inflows across the region. After the Asian crisis, non-FDI capital inflows escalated once again from 2002 until the subprime mortgage crisis of late 2008 (see Figure 5.1). The crisis resulted in the dramatic decline of non-FDI capital inflows throughout the region. The decline in capital inflows during this period was even more dramatic than that experienced during the Asian financial crisis. As mentioned in Chapter 2, capital inflows declined from US$1,038 billion in 2007 to US$61 billion in 2008, while during the Asian financial crisis the decline of capital inflows was around US$387 billion in the period 1997–98. Portfolio and other investment inflows contributed substantially to such a slump.