By Shamim Adam Nov. 20 (Bloomberg) — Asian policy makers are studying capital controls to limit “hot money” inflows that may stoke asset bubbles and force their currencies to appreciate. 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. Carry Trade “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. 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. ‘Facing a Dilemma’ “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 yesterday. “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 yesterday. 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 ($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 yesterday. Foreign Investors 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 yesterday. 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 ($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 yesterday. Federal Reserve Bank of Philadelphia President Charles Plosser said capital flows into Asia are a result of a stronger recovery in the region. “The flows are not such that I consider them to be either threatening or inconsistent with fundamentals,” Plosser said in Singapore yesterday. “To the extent that you believe that the prospects for economic growth are stronger in Asia than they are in the U.S. right now, you would expect to see some of the capital flows going in that direction.” To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net
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Capital Controls in Asia to Limit `Hot Money’ Inflow May Threaten Recovery
