An influx of foreign capital is prompting drastic measures by fast-growing emerging economies that are moving to stem capital inflows to keep their exports competitive and currencies in check.
A move to choke off the flow of so-called "hot money" into countries such as India, Indonesia and South Korea would cool the possibility of asset bubbles in domestic real estate and equity markets. But it would also widen an already gaping trade imbalance between major Western nations and Asia's emerging market countries.
Brazil yesterday closed a loophole that had allowed investors to sidestep a 2-per-cent tax on foreign investment in equities and bonds. That followed Taiwan's decision earlier this month to ban foreigners from buying fixed-term deposits.
"I think this is going to be one of the big trends in Asia ... There is a very strong risk that other countries start to jump on the bandwagon and try these things out," Richard Kelly, a senior economist at TD Securities Inc., said in an interview.
Record low interest rates in the United States and Europe have sparked a surge of capital into hot emerging markets as investors chase higher yields.
However, the speculative flows have put upward pressure on many emerging-market currencies, which could hurt their crucial export sectors. Brazil's real, for example, has gained about 36 per cent against the U.S. dollar this year.
Most emerging-market countries have tried to manage the issue by intervening in currency markets to keep a lid on their rising currencies. Now there are concerns policy makers will choose the short-term benefits of limiting foreign capital inflows rather than allowing a rebalancing of trade flows that would come with increased foreign investment and appreciating currencies.
"You are talking about a few billion people all going through this development process at the same time, and all behind these currency protections and export-led growth. It's raising a lot of concerns. I think this is definitely something we're going to see a lot more emerging markets take on," Mr. Kelly said.
Indeed, Indonesia, whose fast-growing economy has attracted massive foreign investment leading to a 17-per-cent rise in its currency against the greenback this year, said yesterday it is considering steps to reduce capital inflows.
The Indonesian rupiah fell sharply against the U.S. dollar after Darmin Nasution, the senior deputy governor of Bank Indonesia, said the central bank was "seriously" studying curbing foreign ownership of Indonesian debt.
In India yesterday, the rupee came under pressure against the U.S. dollar despite Finance Secretary Ashok Chawla denying a newspaper report that the government was set to restrict foreign borrowing by Indian companies. Foreign investors have plowed more than $15-billion (U.S.) into Indian equity markets this year, helping spark a 75-per-cent increase in India's benchmark index. However, Mr. Chawla played down any immediate threat from capital inflows. "As of now it is not a concern. As the situation evolves we will see what needs to be done," he said.
Asia's developing economies could come under pressure to reduce the flow of foreign capital if China does not follow through on hints it will allow its currency, the yuan, to appreciate against the U.S. dollar next year, said Erik Nilsson, senior international economist at Bank of Nova Scotia.
"If we go deep into 2010 without some adjustment [from China]that is going to create some strain for the rest of Asia," he said.