(Bloomberg) — U.S.-led banking turmoil is driving money into Asian assets, with investors betting that China and the region’s emerging economies are better positioned to weather the downturn.

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Citibank’s analysis of global financial conditions shows that Asian financial markets have tightened less than those in the US, with most Asian currencies gaining ground against the US dollar. An index of financial stocks in the region excluding Japan has risen since March 10 — the day Silicon Valley Bank collapsed — compared with a nearly 10% drop in the American banking index over the same period.

“We think Asia still remains relatively well insulated,” said Johanna Chua, Citi’s managing director and head of Asia-Pacific economic and market analysis. “A US-centric recession means the US dollar will track lower, which is more conducive to capital flows to Asia.”

Economists say one factor working in the Asia-Pacific’s favor is a softer pivot in monetary policy, with the central banks of Australia, South Korea, Indonesia and India in the midst of halting their tightening cycles. China, with its monetary policy easing and reopening delayed from Covid, is the top attraction for investors.

This was reflected in $5.5 billion in fund flows into emerging-market equity funds in the four weeks to the end of March, led by Asia, according to TD Securities figures citing EPFR Global data. More than 70% of that money went to China. At the same time, developed-market equities suffered net outflows of $8.6 billion, hitting the US the hardest.

“Investors still see EM Asia as probably the most favored region, followed by Europe and possibly the US,” David Chao, global market strategist for Asia-Pacific at Invesco Asset Management, told Bloomberg Radio on April 4. If you think the Fed is going to hit a pause button on interest rate hikes, that will certainly bring capital flows back to EM Asia.”

Amid financial stability risks and signs of cooling demand, ending the Fed hike cycle could help Asia by easing pressure from a stronger dollar on external currencies and reducing the greenback’s appeal as a safe haven.

The Asian Development Bank said this week that Asia’s developing economies, led by China, are on track for faster growth and slower inflation this year and next, while advanced economies are contributing to a gloomy global outlook.

Frederick Newman, chief Asia economist at HSBC Holdings Plc in Hong Kong, said China’s rebound is expected to spread across the region, which will also benefit from supply-chain diversification, rising output and a lack of excessive credit growth.

Citi’s Chua noted that Hong Kong and Thailand, which have benefited from China’s reopening, and domestic service-led economies such as India and the Philippines “appear relatively more resilient” to global growth shocks. “Small, open economies” such as Singapore, Vietnam, South Korea, Malaysia and Taiwan may be more vulnerable to these spillovers.

The banking turmoil could also mean that Asian tech money invested in the US could now start to find its way back.

“Within Asia, I think Singapore will be the main beneficiary,” said Prashant Newnaha, macro strategist at TD Securities. “Singapore has a strong legal and banking framework and is looking to establish itself as a leader in technology and crypto within the region.”

Still, there are risks. Recent gloomy factory data from China has undermined confidence in the pace of the country’s rebound. And China’s poor relationship with the United States raises the potential risk of investing in places like Hong Kong and Taiwan, Invesco’s Chao said.

Moreover, Asia is not entirely immune to financial instability spilling over from the United States.

“The outlook really depends on whether things stabilize in Europe and North America,” said Jonathan Kearns, chief economist at Sydney-based investment management firm Challenger Ltd and a former Reserve Bank of Australia official. “If there is some degree of ongoing turbulence, it will spill over into Asia.”

–Assisted by Garfield Reynolds and Bonnie Au.

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