It is not just China that has been experiencing massive increases in money supply propelled by inward flows of money. Most of Southeast Asia is seeing the same phenomenon.

But what happens when the music stops? There now seems little likelihood that the US Federal Reserve will go for another round of so-called quantitative easing – buying US government bonds. And though US Federal Reserve Chairman Ben Bernanke seems set on keeping interest rates well below inflation to help bail out banks and mortgaged households, the threat of downgrading of US debt just issued by S&P may force caution and push up rates.

So where will this leave Asian countries that have allowed their currencies to rise by 5-10 percent over the past year but have still been intervening to cool the upturns and in the process seen steep increases in their foreign exchange reserves and, as a consequence, in their money supplies? A part of the rise in reserves has been due to the appreciation of the euro, in which a minor part of reserves is held, against the dollar.

But this impact is small compared with actual inflows. These have proportionately been bigger in Southeast Asia than for China. In turn they have been behind mostly buoyant stock markets. Taiwan too, despite controls, has seen its reserves gain US$30 billion to US$392 billion in the past six months – though proportionately this has been insufficient to give a major boost to money supply.

But look at the numbers elsewhere. Between August 2010 and March this year Singapore's foreign exchange reserves rose by US$27 billion, or 13 percent, to US$233 billion, making an annual gain of US$36 billion. That is a huge amount even by Singapore standards of reserve accumulation. Given that Singapore's M1 money supply is a mere S$114 billion it is no surprise that even after sterilization efforts M1 has grown at 19 percent over the past year. Singapore’s reserves are even three quarters of its M3, the broadest measure of money supply.

Malaysia shows an even more remarkable performance – at least for a country that normally sees large-scale net inflows of short-term capital. The latter item has moved roughly into balance so with the country continuing to run a current surplus of some US$30 billion there has been a huge rise in official reserves – from US$95 billion last August to US$113.8 billion in March. Again, this is reflected in M1 growth of 13 percent in just six months or an annualized rate of 27 percent. Unless there is a sharp fall in export prices, the Malaysian ringgit, now at 3.02 to the dollar seems likely to continue to appreciate back to its pre-Asian crisis level of around 2.6 or even higher.

The story is repeated in Thailand where reserves hit US$184.6 billion in April, up from US$150 million level in mid-2010. While Thailand continues to run a healthy current account surplus, the surge has been mainly due to short-term capital flows. M2 has also spurted and is running at an annualized 20 percent. Thailand is now pushing up interest rates but that may simply encourage more inflows, at least until the market perceives that the baht is no longer undervalued – it is at 30 to the dollar and creeping towards its 1997 level – 25.5 to the dollar. But even that would be 30 percent below its level then when measured by the real effective rate which takes account of trade weights and relative inflation.

Even the Philippines has been seeing big net inflows, pushing the reserves up dramatically from US$49 billion last August to US$66 billion today with the central bank appearing to prefer accumulation to a further rise in the peso, which is up by 5 percent over the past year. The impact on money supply has been less marked than elsewhere but even so M1 is up 12 percent on an annual basis.

These numbers suggest that while Southeast Asian markets are not expensive by current global standards they are at risk either of a sharp reduction in flows if the US ceases to be so profligate, of domestic interest rises to counter inflation and deter real estate speculation, or of the impact on export earnings either of a sharp setback to commodity prices or significant additional currency appreciation. And however good their fundamentals may be compared with Europe, or the US or China, they are particularly sensitive to the skittishness of foreign portfolio investors.