World Bank Says Asia May Need Some Capital Controls
Nov. 9 (Bloomberg) -- Asian economies may need to turn to capital controls as quantitative easing by the U.S. 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 U.S. Federal Reserve last week announced plans to buy $600 billion of long-term government bonds in its second effort at so-called quantitative easing, or QE2, aiming to stoke U.S. 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 yesterday. "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.
Job Threat
Manufacturers in Malaysia and Thailand on Oct. 14 called on policy makers to curb "speculative" capital inflows, saying currency gains pose a threat to output, trade and jobs.
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."
Temporary Steps
South Korea's won fell to a one-week low today amid speculation local regulators will tighten curbs on the use of derivatives to help damp exchange-rate volatility. Heightened concern that some European governments will struggle to pay debt also bolstered demand for dollars and pushed currencies lower.
Thailand last imposed limits on fund inflows in December 2006 to slow baht gains and protect exporters, a measure that led foreign investors to flee the country's financial markets and spurred the benchmark index's biggest slide in 16 years.
"We may see some capital controls, particularly on debt, but they won't be disruptive," said Chetan Ahya, an economist at Morgan Stanley in Singapore. "Having learnt from what had happened in Thailand in the previous cycle, controlling equity flows won't be top on the agenda."
Productive Investment
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.
China's Vice Foreign Minister Cui Tiankai said Nov. 5 the Fed's decision to pump liquidity into the U.S. may hurt global confidence. Vice Finance Minister Wang Jun said the next day after Asia-Pacific Economic Cooperation forum finance chiefs met in Kyoto, Japan, that the U.S. move could contribute "tremendously" to global growth.
Nations from Brazil to Thailand and South Korea have tried to restrain their currencies and protect exporters as investors seek higher-yielding emerging market assets amid near-zero U.S. borrowing costs. Capital flooding into Asia could lead to asset bubbles and financial instability, International Monetary Fund head Dominique Strauss-Kahn said Oct. 18.
Taxes on Bonds
Thailand said 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 has kept its currency's advance against the dollar to less than 3 percent since mid-June, a strategy that's contributed to other currencies rising and nations taking steps to prevent an "unfair disadvantage," U.S. Treasury Secretary Timothy F. Geithner said last month.
As the dollar weakens, China is likely to maintain the value of the yuan within its targeted band by accumulating reserves, Sri Mulyani said.
While short-term capital controls may be sometimes necessary, the World Bank managing director said she was against currency intervention, except to restrain short-term volatility.
Southeast Asian countries that are manufacturing-based are likely to face balance-of-payments challenges due to stronger currencies, the former Indonesian finance minister said. Imports will become cheaper and exports less competitive, she said.
To contact the reporter on this story: Barry Porter in Kuala Lumpur at bporter10@bloomberg.net
To contact the editor responsible for this story: Chris Anstey in Tokyo at canstey@bloomberg.net
Find out more about Bloomberg for iPhone: http://m.bloomberg.com/iphone/
No comments:
Post a Comment