(Adds comments, changes dateline to add SINGAPORE)
HONG KONG/SINGAPORE, Nov 24 (Reuters) - A rapid economic rebound, strong currency gains and higher interest rates in emerging East Asia are drawing in large foreign fund inflows which could be potentially destabilising, the Asian Development Bank said in a report.
The Manila-based multilateral bank said the risks to the market outlook are "moderately balanced on the downside compared with the first half of the year."
ADB which considers emerging East Asia as including China, Hong Kong, Indonesia, South Korea, Malaysia, Philippines, Singapore, Thailand and Vietnam, made these remarks in its report "Asia Bond Monitor", released on Tuesday.
The author of the study told reporters in Singapore that the economic recovery which was taking hold across the region was partially fuelled by government measures through public expenditures, loan guarantees and subsidies.
"That to some extent is fuelling the economy, fuelling some of the asset market, causing asset inflation -- sustainability of this approach can be questioned," said Noritaka Akamatsu, senior advisor, office of regional economic integration.
"If you look just at the growth, it is very encouraging, but you have to question the quality of that growth," he said referring to the authorities having to consider ways to exit from this approach without harming growth prospects.
The bank's report also warned that major risks to the market outlook included uncertainty about the global economic recovery, a possible rise in inflation, premature tightening of monetary policies and potentially destabilising capital inflows.
"These inflows along with ample domestic liquidity, still accommodative monetary policies, and limited flexibility of exchange rates in the region-could pose major challenges for macroeconomic management," it said.
Akamatsu said the fast pace of economic growth in Asia and higher interest rates relative to developed markets was attracting inflows which was boosting Asian currencies. Some analysts fear that will make Asian exports much less competitive, impeding further recovery.
"The challenge for local authorities is that Asian economies are still dependent on exports; the rapid currency appreciation could damage local export oriented industry," he said.
In recent weeks, several emerging economies, including Brazil and Taiwan, have imposed capital controls in an attempt to curb upward pressure on their currencies and prevent strong inflows from creating potentially destabilising asset bubbles. [ID:nSP488359]
ADB said in the report that total outstanding debt in emerging East Asia's local currency bond market grew by 14.8 percent to $4.2 trillion in the third quarter compared with a year ago, up from the 13 percent in the second quarter.
It said that local currency bonds accounted for 62 percent of gross domestic product at the end of the third quarter, compared with 58 percent at close of the second quarter.
"These robust growth rates reflect financing needs for government fiscal stimulus programs, as well as corporate sector funding needs in infrastructure and energy," the report said. (Reporting by Nopporn Wong-Anan and Umesh Desai; Editing by Toby Chopra) ((umesh.desai@thomsonreuters.com; +852 2843 6935; Reuters Messaging: umesh.desai.reuters.com@reuters.net; )) (If you have a query or comment on this story, send an email to newsfeedback.asia@thomsonreuters.com)