The US Federal Reserve’s recent decision to inject more money into the financial system to keep both interest rates and the US dollar low has attracted harsh criticism from many other countries, especially emerging Asian economies worried that it will create more inflows of “hot” money that will drive up domestic property prices and the value of national currencies, in addition to harming exports.
In response to the Fed’s new “quantitative easing” measures, several Asian countries have intervened in the currency market and introduced capital control measures.
Thailand, for instance, last month reinstated a 15 percent withholding tax on purchases of Thai bonds by foreigners. Last week, China announced quotas for the use of short-term foreign debt by financial institutions to crack down on speculative inflows, in addition to twice increasing reserve requirements for its biggest banks.
Taiwan announced its own measures last week by restricting the purchase of government bonds and money-market products by foreigners to 30 percent of approved funds. South Korea was reportedly looking into the possibility of reviving a 14 percent withholding tax on bond purchases by foreigners.
There is little surprise that Asian governments have resorted to defensive measures in response to the super-loose monetary policy being followed in the US.
What makes speculative inflows so unwelcome is that they do not generate real production or employment, but rather represent a monetary “game.”
Nobel laureate Joseph Stiglitz and World Bank managing director Sri Mulyani Indrawati have both spoken in support of Asian economies using capital controls to ward off potential asset bubbles.
The question now is: What happens if existing measures prove ineffective?
Might a “hot money tax” be introduced and what if the Fed comes up with even more quantitative easing measures to boost the US economy?
The Ministry of Finance said on Friday that the financial authorities had decided not to impose management fees on speculative inflows for the time being, because some “progress” has been made in curbing capital inflows utilizing standard measures. However, even if they decide to impose such a fee, it is unlikely to be as effective as they might think, because it is now expected.
When Vice Premier Sean Chen (陳?) told lawmakers on Wednesday that the central bank’s recent daily market intervention during the final trading session — undertaken to prevent the NT dollar appreciating too quickly — was not good for the economy and failed to represent the true value of the NT dollar, he was suggesting a more flexible exchange rate policy and offering different ideas on how to combat capital inflows.
On Thursday, economist Norman Yin (殷乃平) of National Chengchi University told local media that the financial authorities should try to expand the breadth and depth of Taiwan’s capital markets, especially the bond market, to accommodate the inflows of foreign capital, rather than erect a wall of capital controls against them.
These divergent voices are a good start to the debate, but might be insufficient to get the financial authorities to move in a different direction, especially if policymakers become complacent about what they have achieved so far.
We need to ask how Taiwan can best develop the enhanced flexibility and resilience needed to deal with increased capital inflows. At the moment, that is a question even the financial authorities are finding hard to answer.
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