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Draw funds into working capital

Published: 07 Aug. 2012, 21:24

The local money market is turning increasingly apprehensive and standoffish amid worsening economic prospects, which could dry up liquidity for companies and damp overall economy. Investors are placing money in safe assets like government bonds or short-term products. The yields on government bonds are hitting new lows with the three-year bond yielding below the benchmark interest rate of 3 percent.

Even strongest large companies cannot manage to issue corporate bonds higher than 3 percent, which is unprecedented in local capital market. The phenomenon suggests how investors are skeptical of the local economy. Investors want to harbor their money in safe assets even if they offer meager or even zero returns.

The money is channeling to short-term financial products for the same reason. Reserves at the money-market fund accounts for the last six months’ surge of 30 percent. Investors are parking money in short-term instruments so that they can retrieve funds as soon as they discover a more promising investment. It is a wise move for investors with the global economic climate turning bleak with signs pointing to prolonged recession. They would naturally want to be cautious with their money as the local economy moves largely in tandem with the global economy. Experts say now is bad time for investment and advise investors to hold onto their cash.

But the problem is repercussions on the broader economy. A wise choice for individuals can end up harming the economy. Most companies are cash-short and face difficulties in raising funds. The liquidity dry spell for midsized and small companies is serious. They cannot turn to the bond market or banks to raise funds. The gravity in capital toward short-term funds would leave fewer funds to go out to companies that would result in a scale-down in investments. It is why corporate investment remains sluggish despite higher liquidity and lower rates.

If the trend continues, the economy can fall into self-reinforced stagnation. The government may have not much room for maneuvering to accelerate the economy. But it nevertheless should draw up measures to help ease liquidity crunch and draw funds into working capital. It also should keep close watch on the money market movement.