Grave business - my financial world

Tighter capital controls in emerging Asia are inevitable if money keeps pouring into the region and interest rates in the developed world remain at rock bottom.

But don’t expect a rerun of knee-jerk, Draconian measures of the past, which sent investors to the exits en masse. Asian policymakers appear to have learned that the impact of strict controls to deter foreign speculators can take years to undo and wind up being ineffective over the long term.

Authorities from Brazil to Taiwan have moved over the past month to curb what they say are “hot money” speculative flows into their countries which are pushing up their currencies, making their exports less competitive, and fueling potentially destabilizing asset bubbles in stock and property markets.

Russia and Indonesia have also indicated concern that heavy inflows could be economically disruptive.

Measures taken thus far, however, have been aimed at slowing and controlling massive capital inflows, not staunching them completely.

Emerging Asia has led the global recovery, but with central bank policy rates currently averaging a low 4 percent, the region’s economies have not even begun to normalize.

Higher interest rates will put even more upward pressure on Asian currencies, especially with the Federal Reserve promising to keep U.S. rates near zero for a long time, which is diminishing the value of the dollar.

Still, this is all the more reason for policymakers to avoid pulling the gates down on foreign investment and take more targeted action against “footloose capital,” said Bill Belchere, an economist at Mirae Securities in Hong Kong.

“Asia has been adept at absorbing liquidity and handling bubbles in its major countries,” he said.

“When economies strengthen further and you begin to reach full employment and you need higher rates, that’s when it will become a problem. But we are not there yet.”

Indeed, it is one thing for policymakers to identify loopholes and another to actually crack down on speculation with tough measures such as the so-called “Tobin tax” on all global financial transactions, a concept gaining traction in Europe.

But why would they at this point?

Flows into Asia ex-Japan equity funds stand at $17 billion so far this year, not yet offsetting the $25 billion outflow last year, fund tracker EPFR Global says.

Also, officials are more intent on directing foreign investment to where they want the money to go, rather than closing the doors. Taiwan’s ban on foreign deposits was meant to shift the money to the domestic equity and bond market.

Officials from India and South Korea, two countries expected to raise interest rates early in 2010, have told Reuters capital controls are not on their agenda at this point. 

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