Capital inflows to Asia have started slowing down and this trend will likely continue, according to Fitch Ratings.

Fitch attributes the slowdown to the heightened risk aversion of global investors and AsiaÆs deteriorating economic fundamentals.

Foreign direct inflows to Asia in the first quarter of 2008 were still strong, according to Fitch data. The problem lies with foreign participation in local equity markets (which has resulted in net outflows) and international issuance of debt securities (which has slowed). Fitch believes direct foreign investments (FDI) and loan flows could mirror capital market flows in the future.

Fitch tracks four types of capital inflows that have high data frequency: net FDI inflows, net foreign purchases into local equity markets, international banks' external positions in individual countries, and international issuances of debt securities. The agency believes the four data series should provide a general picture of net capital inflows into the region.

So far, there is no sign that net FDI inflows to Asia are weakening. Among capital importers in the region, the major support came from China, India and Singapore, while net FDI inflows have remained stable for Mongolia, Thailand, Indonesia and the Philippines. For capital exporters of Hong Kong, Korea, Malaysia and Taiwan, net FDI outflows have not shown any clear sign of deteriorating.

Foreign funds have reduced exposure to Asian equity markets in the first quarter, however.

For the first six months of the year, foreign net selling in Asian equity markets totalled $13.7 billion, the worst on record since Fitch started collecting this data in June 2001.

Outflows are larger now than they were in 2001 when the tech bubble burst and in 2003 when the Sars epidemic struck. The biggest withdrawal took place in Taiwan, due to its relatively big market capitalisation and its heavy bias towards to the electronics sector.

Net international issuance of debt securities dropped significantly in the first quarter of 2008. Total net issues declined by 47% to $5 billion. The most severe declines were recorded in Hong Kong and Singapore. They are the region's financial hubs and thus more sensitive to recent global capital market developments. Significant declines were also recorded in Malaysia, Thailand and India.