Asian Countries impose Capital and Currency Controls to Moderate the Inflow of Speculative Money

Asian countries are being forced to impose capital and currency controls as zero interest rates in Developed countries moves speculative money towards Asia.The Lehman Crisis in 2008 had led to a global risk aversion of all assets with capital flowing out of the Asian countries as all “risky assets” took a massive dive.But with Markets now calmer and interest rates in Europe,USA and Japan at zero or near zero rates,speculative capital is again moving towards Asia ex Japan.Asia is looked upon as a safe haven as the fiscal and debt situation of this region’s countries remain quite strong compared to the Developed countries of Europe and North Amercia.The growth prospects and the expected returns are also much better.This has resulted in a tough situation for the policymakers of these countries.Large capital inflows are destabilizing as they greatly increase the Currency Volatility with effects on Inflation as well.Central Banks forced to sterlize these inflows to prevent currency appreciation indirectly increase the inflation rate.Controlling the inflation rate through higher interest rates lead to additional capital inflows further exacerbating the situation.

Countries like Taiwan,Indonesia and South Korea have tried to solve this problem through currency and capital controls to stem the inflow of speculative capital.The policy makers in these countries have to do a fine balancing act as they do not want to prevent productive long term foreign investment.Taiwan was the first one off the blocks imposing controls over foreign short term deposits held by the banking system.

Taiwan regulator moves to curb ‘hot money’ – MSN

Taiwan’s financial regulator has barred foreign investors from parking funds in time deposits in a bid to curb “hot money” flowing into the island, authorities said Wednesday.The Financial Supervisory Commission said in a statement that the measure, effective immediately, followed a recommendation from the central bank, which is keen to curb speculative activity in the exchange market.”We are not imposing any capital control, at least for now,” said Spencer Lin, head of central bank’s forex department.”They should buy stocks or bonds… rather than parking the money in time deposits,” he said.

South Korea with its highly developed economy and a floating currency system has seen the highest tamount of volatility in its currency.The Korean Won had depreciated by a whopping 30% during the Lehman crisis has bounced back sharply with improvment in the Global Economy.South Korea has a very large Export Sector which faces huge problems with the currency fluctuating in such an extreme manner.To reduce speculation,South Korea has imposed position limits of the size of currency exposure of Banks

South Korea unveils currency controls – Reuters

The authorities, alarmed by the won’s sharp swings during recent market turbulence caused by Europe’s debt problems, have been priming investors for weeks for action aimed at stabilizing its currency and cooling overseas borrowing.The well-flagged new restrictions slap limits on banks’ and other financial institutions’ currency forwards, cross-currency swaps as well as non-deliverable currency forwards.”These measures are aimed at reducing the volatility in capital flows that poses a systemic risk in the country,” South Korea‘s finance ministry, two financial regulators and the central bank said in a joint statement.

Indonesia which has a more consumption oriented economy with a much lower dependence on the external sector unlike its neighbors has also seen a sharp appreciation in its currency due to capital inflows.The government has introduced some mild controls like increasing the maturity of the government debt,lowering the  return of commercial bank deposits with the Central Bank and minimum time holding requirements.

Indonesia Takes Aim at Speculative Money – WSJ

Indonesia, with a floating currency and relatively high interest rates, is an attractive play for investors in high-yield currencies, making it vulnerable to swings in global risk-taking appetite. So far this year, the flow has been positive: The rupiah is up about 2.8% against the U.S. dollar, while Indonesia’s benchmark stock index is up 12.8%.Bank Indonesia will introduce money market instruments, known as Sertifikat Bank Indonesia, or SBI, with nine-month maturities in August and 12-month terms in September, complementing current maturities of one, three and six months, Mr. Nasution said. Starting July 7, buyers will have to keep the securities for at least one month and can sell back the securities during the minimum holding period only to the central bank, he said. Previously, they were traded on the secondary market.In addition, Bank Indonesia will pay commercial banks a lower rate for their deposits, starting Thursday. The new deposit rate—which will be a percentage point below the 6.5% benchmark policy rate instead of half a percentage point previously—should create an incentive for banks to invest money elsewhere, said Matt Hildebrandt, a Singapore-based JP Morgan economist.

India too has been affected though to a much lesser degree by the capital flow volatility.The Central  Bank has not imposed any control till now, as the capital flows remain under check and the currency movement is also not as vicious as the Korean Won.However the pressure is increasing as India’s inflation rate has crossed 10% implying a hardening of the interest rates soon.This will invite strong Capital Inflows driven by high returns and growth as the Indian Economy chugs along at an impressive 8-10% GDP growth rate with little effect from the Greek Contagion.