Emerging Asia sets up controls to curb capital inflows

Traders believe South Korea has intervened repeatedly in the currency markets to rein in the won. In the Philippines, government officials have said the rise of the peso is a matter of concern.

Reflecting the prevailing Asian concerns, Thai Finance Minister Korn Chatikavanij said on Tuesday foreigners "will understand if their tax burden is similar to that borne by Thai investors." "Foreign investors have used the bond market to park their money, therefore it's not necessary to grant them privileges," he said, according to a Reuters report. According to the Thai finance ministry, the tax, which covers bonds issued by the government, the central bank and state enterprises, will be effective from Wednesday.

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According to analysts Asian economies hit by the influx of funds are left with options like bringing in more capital controls and putting in place ways to squeeze foreign investors' access to assets. However, such measures of financial protectionism entail the risk of setting off a currency war and slowing down the weak global recovery.

Taking the huge risks of such actions into account, some analysts think the threat of a currency war is overblown.
"...the regional approach will most probably remain a measured and sensible response pitched at moderating the inflow and curbing appreciation rather than being aimed at shutting capital out and pushing currencies weaker, wrote economists at Capital Economics in a note.

That said, economists Kevin Grice and Sukhy Ubhi believe that Asian stocks and even local currencies will probably move higher as growth in Emerging Asia will probably remain far superior. "We expect regional equities and local currencies to rise further in the period to end 2011 although the generally outsized gains of recent months will probably not be repeated," they wrote. While emerging Asia will have to continue facing the challenge of coping with strong capital inflows the US and Europe will enjoy the benefits of weaker currencies.

The analysts say the afflicted Asian countries are addressing the problem in three ways.

In countries like South Korea, Australia, the Philippines and Indonesia policy rate hikes are either being scaled-back or delayed. "Less monetary tightening in Asia will help to contain interest rate differentials, thereby reducing the incentive for capital inflows," say the analysts.

Secondly, currency market intervention has increased and foreign reserves are going up, providing the countries a cover against further shocks in the financial system.

The third route, the analysts say, is the imposition of capital controls.

"For now the restrictions are mild and targeted toward speculative inflows. This will probably stay the focus. Draconian measures were introduced in Thailand in late 2006 but these are widely-recognized across Asia as having been a disaster."

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