Capital flows `need watching'

After restrictions on the inflow of foreign capital were scrapped, pundits yesterday urged the government to either hammer out an effective mechanism to manage "hot money" or improve the local investment environment to entice multinationals to take root here.

"Foreign capital inflow can help boost the local economy and the stock market," Hsieh Ming-ruey (謝明瑞), a professor from the National Open University's department of business, told a seminar organized by the Taiwan Research Institute (台綜院) yesterday.

"But when they [foreign investors] leave, local markets will be hurt and roiled by the outflow of foreign capital," Hsieh said.

Hsieh urged the government to take precautionary measures after scrapping, in early October, the 12-year-old qualified foreign institutional investor (QFII) mechanism, which limited each overseas financial institution to a portfolio of Taiwan shares worth under US$3 billion.

In his presentation, Hsieh argued that the governments have tended to use relaxation of restrictions on foreign investments, be it direct or indirect, as an effective stimulus to boost the market.

However, without an improvement in the nation's economic fundamentals, foreign investors wouldn't stay and this rapid inflow and outflow of money would cause instability in the stock market, he said.

A buffer, or a sound investment environment, will be necessary to alleviate any impact from foreign capital flows when hot money turns cold, Hsieh said.

Foreign investors have been playing an important role in the market, said Liu Fu-ming (劉富明), chairman of Fortune Securities Co (日進證券), at the same seminar yesterday.

"Foreign stock investments made a great contribution to the TAIEX's benchmark, which has risen by 2,000 points within the past ten months," Liu said.

Foreign investors, who have shown great confidence in Asian economies, bought US$544.6 billion-worth Taiwanese shares during the same 10-month period, Liu said, adding that "additional US$30 billion may flow into the market now the government has scrapped the QFII mechanism."

In case capital flows turn negative and depress the TAIEX, Liu yesterday urged local stock investors to pay close attention on the nation's future economic outlook as well as what constituted a fair price for local shares.

To regulate hot money, Yu Ming-nan (游明男), deputy director of the central bank's foreign exchange department, yesterday said that the Securities and Futures Commission (證期會) would closely monitor any irregular buying activities on the stock exchange.

If foreign arbitragers move in to disturb the foreign-exchange market, however, the central bank will act to prevent speculative activities, he said.

He said that the central bank keeps a close watch on inflows of foreign capital.