Asia considers capital controls on inflows

Officials from India, South Korea and Indonesia are among those who have expressed concern over the funds flooding into their markets, prompting gains in stocks, real estate and other assets. Taiwan last week banned foreign investors from placing funds in time deposits on concern about currency speculation.

Asia is leading the world's recovery from its deepest recession as demand for the region's goods improves. Policy makers are concerned that stronger currencies will stymie the potential rebound in exports and encourage capital inflows that may bring instability to financial systems and spur inflation.

“Concerns about hot money inflows are not surprising given the outperformance of Asian equity and real estate markets over recent months,” said Mitul Kotecha, head of global foreign- exchange strategy at Calyon in Hong Kong. “If Asian central banks act on these concerns, it will have important implications for currencies in the region and may slow or put a break on the sharp appreciation trend that has been in place.”

Eight of 10 Asian currencies tracked by Bloomberg have strengthened against the U.S. dollar this year, led by the Indonesian rupiah, the South Korean won and the Indian rupee. Housing prices in some Asian nations are rising, while the region's stock markets have surged in the past six months.

The Federal Reserve's policy of keeping interest rates near zero is fueling the wave of speculative capital that may cause the next global crisis, Hong Kong's Chief Executive Donald Tsang said Nov. 13.

“We have a U.S. dollar carry trade at the moment,” Tsang said. “Where is the money going — it's where the problem's going to be: Asia. You can see asset prices going up, not only in Korea, in Taiwan, in Singapore and in Hong Kong, going up to levels that are incompatible or inconsistent with the economic fundamentals.”

The carry trade is where investors borrow cheaply in one currency and use the funds to invest in other currencies.

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