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Updated Saturday, November 21, 2009 1:09 pm TWN, By Shamim Adam, Bloomberg

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Asia considers capital controls on inflows

Asian economies have battled a surge in speculative funds as recently as 2007 from investors drawn by economic growth, interest-rate differentials and prospects of rising currencies. While policy makers across the region have cut borrowing costs, some to record lows, to battle the financial crisis, investors encouraged by Asia's growth outlook over the U.S. and Europe are picking it as their choice destination.

“These economies could of course raise interest rates to contain inflation and increases in asset prices,” Hong Kong Monetary Authority Chief Executive Norman Chan said Thursday. “But the fear is that once interest rates are raised the carry trade will become even more active, attracting even more fund inflows. Asian economies are therefore facing a dilemma.”

India may take steps to slow capital inflows if foreign investment surges, Finance Secretary Ashok Chawla said Thursday. Policy makers may set a limit on the amount of money that local companies can borrow from abroad, the Economic Times reported, citing a Finance Ministry official it didn't name.

Foreign funds purchased a net 732.5 billion rupees (US$15.77 billion) of Indian stocks this year, after being net sellers in 2008, sending the rupee 4.7 percent higher and hurting sales at exporters including Gokaldas Exports Ltd.

In Indonesia, the central bank is “seriously” studying the option of limiting foreign fund inflows into its short-term bills, Senior Deputy Governor Darmin Nasution said Thursday. South Korea may discuss measures to address the U.S. dollar carry trade that is causing its currency to strengthen, Kim Jong Chang, governor of the Financial Supervisory Service, said Thursday. Government agencies plan to hold talks on what can be done on the issue, Kim said.

Taiwan central bank Governor Perng Fai-nan on Oct. 14 expressed concern foreign investors have about NT$500 billion (US$15.5 billion) in Taiwan dollar accounts, five times more than what the central bank considers acceptable. These funds may be used for purposes other than stock investments, Perng said.

The island's decision to implement capital controls have had some effect. Taiwan has seen a decline in speculative capital from overseas, with the amount falling to NT$350 billion from about NT$400 billion a month earlier, Perng said Thursday.

Federal Reserve Bank of Philadelphia President Charles Plosser said capital flows into Asia are a result of a stronger recovery in the region.

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