A string of countries have edged towards imposing capital controls to stop short-term speculative inflows driving their currencies higher amid concerns about the growth of an emerging market asset bubble.
On Thursday Brazil, which surprised the markets a month ago by imposing a 2 per cent tax on the inflow of money destined for financial assets, said it would further tighten those restrictions. The finance ministry imposed a new 1.5 per cent tax on the issuance of depository receipts, assets that allow Brazilian companies to offer shares on foreign exchanges.
The move comes amid a flurry of miscellaneous policy changes by emerging markets, designed to slow inflows of foreign money, and comments from public officials about capital controls. Economists said that while most of the moves were modest, they did underline the challenges many emerging markets faced in trying to prevent both rapid appreciation against the dollar and the inflation of asset bubbles.
“This is a policy dilemma common to many countries,” said Gerard Lyons, chief economist of Standard Chartered bank. “It all links back to the CNY [Chinese renminbi].”
With the renminbi pegged to the dollar, despite pleas from Washington to let it float, emerging market currencies climbing against the greenback also rise against the Chinese currency, making companies less competitive against China’s low-cost manufacturers. Last week Taiwan imposed restrictions on overseas investors placing funds in time deposits. Financial markets have been on the alert for any country following Brazil and Taiwan’s lead.
“Recent measures from Brazil and Taiwan curbing capital inflows send a clear signal: emerging market policymakers are far away from accepting a sustained reallocation of portfolio capital from the west, and its liquidity and currency implications,” said David Bloom at HSBC.
On Thursday, a significant number of Asian currencies fell against the dollar after senior officials in India, Indonesia and Thailand spoke publicly about the possibility of intervening to restrict flows of hot money in search of high yields.
The Indonesian rupiah suffered its biggest decline since February, in spite of official attempts to play down suggestions by Hartadi Sarwono, deputy governor of Bank Indonesia, that the bank was “studying” restrictions on foreign purchases of short-term bank debt. The rupiah fell for a fourth day, the longest consecutive negative sequence since April, after Darmin Nasution, senior deputy governor, said the bank was “seriously” studying such controls, but had no plan to implement them.
In India, Ashok Chawla, finance secretary, said the government might take steps to slow capital inflows if foreign investments surged, because of exporters’ concerns that a stronger currency would reduce their international competitiveness.
In Hong Kong, Norman Chan, head of the Monetary Authority, warned that with surging capital inflows into Asia, asset prices in the city might go up sharply and “become increasingly disconnected from economic fundamentals”. Hong Kong reported a record HK$567.5bn (US$73.2bn) in fund inflows between October 1, 2008 and last Friday, according to the HKMA.
Ronald Arculli, chairman of Hong Kong’s top exchange, also told Bloomberg on Thursday that “we’re seeing signs of potential asset bubbles” in Asia.
In Bangkok, Tarisa Watanagase, governor of the central bank, said the bank would “step in to take care of the baht when it is needed”. Local newspapers have said the bank is also considering capital controls, citing senior officials.
Dr Tarisa said there was no need for capital controls because the baht was moving in line with other regional currencies.
Meanwhile, South Korea said it would tighten its control over foreign currency liquidity at local banks to make them less vulnerable to capital flight. The Financial Supervisory Commission said on Thursday it would limit banks’ foreign currency forward deals with exporters to prevent a repeat of the liquidity crunch last year at the height of the financial crisis.
Capital controls have a mixed reputation among Asian emerging markets. The surprise imposition of restrictions by Malaysia in 1998 during the Asian financial crisis has been credited by some with keeping it relatively immune from the aftermath of the meltdown. But controls imposed by Thailand in 2006 during a political crisis sparked the largest one-day fall in Thailand’s stock market.
Reporting by Alan Beattie, Kevin Brown, Peter Garnham, Jonathan Wheatley, Song Jung-a and Justine Lau
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