Asian economies may need to turn to capital controls as quantitative easing by the US threatens to spur asset bubbles in the region’s stock, currency and property markets, the World Bank said.
Any curbs should be “targeted,” temporary and tailored to address specific problems, Sri Mulyani Indrawati, a World Bank managing director, said in an interview. This could include countries tying up funds for as long as a year to help limit hot-money, she said.
The US Federal Reserve last week announced plans to buy US$600 billion of long-term government bonds in its second effort at so-called quantitative easing, or QE2, aiming to stoke US economic growth. Policy makers from Asia to South America have responded by warning it could have the side-effect of depressing the dollar and sparking capital flight to emerging markets.
“Certain assets will become, potentially, bubbles,” Sri Mulyani said in Kuala Lumpur late on Monday. “The quantitative easing will create a lot of liquidity flooding to the East Asia-Pacific region, because it is the most dynamic and attractive with a higher return on investment.”
Real-estate prices are a concern in China, Australia and parts of Southeast Asia, she said. Japan, Thailand and Malaysia have seen their currencies surge more than 10 percent against the dollar this year, while some of the region’s stock markets have jumped more than 50 percent, Sri Mulyani said. Sri Lanka’s benchmark stock index is up more than 90 percent this year, while the measures for Thailand and Indonesia have exceeded 40 percent, according to Bloomberg data.
During the Asian financial crisis between 1997 and 1998, then-Malaysian prime minister Mahathir Mohamad drew international criticism and alienated foreign investors when he imposed capital and currency controls to block speculators betting against the ringgit. Mahathir called George Soros a “moron” and accused him of attacking the country. The billionaire investor responded by describing Mahathir as a “menace to his own country.”
“In 1997-’98, the words ‘capital controls’ were forbidden and stigmatized,” said Sri Mulyani, 48, who joined the World Bank in June and oversees the Asia-Pacific and Latin America areas. “Now the problem of capital is so systematic and huge globally, it has now become universally acceptable to have a certain type of temporary capital controls.”
Sri Mulyani said that “a more narrow, targeted and less permanent sort of control is going to be better in this case,” adding that governments may also want to consider policy measures to help turn capital inflows into more productive long-term foreign investment.
Thailand said on Oct. 12 it will remove a 15 percent tax exemption for foreigners on income from domestic bonds, joining South Korea and Brazil in seeking to hold back currency gains as investors pour a record amount of money into emerging markets. Korean regulators started an audit of banks handling foreign currency derivatives last month, and Brazil raised a tax it charges foreigners on investments in fixed-income securities.
China yesterday pledged to tighten efforts to stem the flow of speculative money into the country, after criticizing the US Federal Reserve’s decision to pour billions of dollars into the US economy.
The State Administration of Foreign Exchange said in a statement that it would strictly manage quotas for financial institutions’ short-term overseas borrowing.
It will also closely inspect fund-raising proceeds by overseas-listed Chinese firms and foreign direct investment, the agency said.
The regulatory agency has said investigations uncovered US$7.34 billion of non-compliant foreign exchange transactions from February through last month and criticized six banks for violating rules.
The regulators also said they would set a minimum level for foreign exchange positions that banks must hold overnight, a shift from previous rules that require banks to hold either some or no foreign exchange positions.
Analysts have said banks in China are currently reluctant to hold foreign exchange positions, primarily weakening US dollars, due to fears of exchange rate losses.
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