Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Asia and the Financial Crisis, Asset Price Bubbles and Capital Controls

Economics / Credit Crisis 2010 Sep 19, 2010 - 07:10 AM GMT

By: Global_Research

Economics

Best Financial Markets Analysis ArticleKavaljit Singh writes: Capital controls are back in fashion. In June 2010, South Korea and Indonesia announced several policy measures to regulate potentially destabilising capital flows, which could pose a threat to their economies and financial systems.

South Korea it announced a series of currency controls in June to protect its economy from external shocks. Indonesia quickly followed suit when its central bank deployed measures to control short-term capital inflows. In October 2009, Brazil announced a 2 per cent tax on foreign purchases of fixed income securities and stocks. Taiwan also restricted overseas investors from buying time deposits.



The policy measures introduced by South Korea's central bank have three major components: restrictions on currency derivatives trades; enhanced restrictions on the use of bank loans in foreign currency; and, further tightening of the existing regulations on foreign currency liquidity ratio of domestic banks.

The new restrictions on currency derivatives trades include non-deliverable currency forwards, cross-currency swaps and forwards. New ceilings have been imposed on domestic banks and branches of foreign banks dealing with forex forwards and derivatives.

OBJECTIVES OF CONTROLS

The overarching aim of currency controls in South Korea is to limit the risks arising out of sharp reversals in capital flows. Despite its strong economic fundamentals, South Korea witnessed sudden and large capital outflows due to de-leveraging during the global financial crisis. It has been reported that almost $65 billion left the country in the five months after the collapse of Lehman Brothers in September 2008.

Another objective of these policy measures is to curb the country's rapidly growing short-term foreign debt. At $154 billion, its short-term external debt accounts for as much as 57 per cent of its foreign exchange reserves. A sudden shift in global market sentiment can trigger large reversals in short-term capital flows, thereby precipitating a financial crisis of one sort or another.

Bank Indonesia, the country's central bank, announced a one-month minimum holding period on Sertifikat Bank Indonesia (SBIs). During the one-month period, ownership of SBIs cannot be transferred.

Issued by the central bank, the one-month SBIs are the favourite debt instruments among foreign and local investors because of their high yield (an interest rate of 6.5 per cent in early June 2010) and greater liquidity than other debt instruments.

The central bank will also increase the maturity range of its debt instruments to encourage investors to park their money for longer periods. These new curbs are in response to growing concerns over short-term capital inflows. Indonesia's relatively better economic performance has attracted large capital inflows in the form of portfolio investments, since early 2009.

Consequently, Indonesia's stock market index was up 85 per cent in 2009, the best performer in the entire Southeast Asian region. The rupiah rose 17 per cent against the dollar last year.

ASSET PRICE BUBBLE

However, the Indonesian authorities remain concerned that its economy might be destabilised if foreign investors decide to pull their money out quickly. Analysts believe that these new measures may deter hot money inflows into the country and monetary policy may become more effective. Despite recovering faster than developed countries, many emerging markets are finding it difficult to cope with large capital inflows. Apart from currency appreciation pressures, the fears of inflation and asset bubbles are very strong in many emerging markets.

The signs of asset price bubbles are more pronounced in Asia as the region's economic growth will continue to outperform the rest of the world. As a result, the authorities are adopting a cautious approach towards hot money flows and considering a variety of policy measures (from taxing specific sectors to capital controls) to regulate such flows. 

USE OF CAPITAL CONTROLS

Contrary to popular perception, capital controls have been extensively used by both the developed and developing countries in the past. Although mainstream theory suggests that controls are distortionary, rent-seeking and ineffective, several successful economies have used them in the past. China and India, two major Asian economies and “success stories” of economic globalisation, still use capital controls today.

Post-crisis, there is a renewed interest in capital controls. It is increasingly being accepted in international policy circles that due to the limited effectiveness of other measures, such as higher international reserves, capital controls could protect and insulate the domestic economy from volatile capital flows.

Even the IMF these days endorses the use of capital controls, albeit temporarily, and subject to exceptional circumstances. In the present uncertain times, imposition of capital controls becomes imperative since the regulatory mechanisms to deal with capital flows are national whereas the financial markets operate on a global scale.

Yet, it would be incorrect to view capital controls as a panacea to all the ills plaguing the present-day global financial system. The imposition of controls by South Korea and Indonesia assume greater significance because both countries are members of G-20. It remains to be seen how the G-20 responds to the use of capital controls. Will it take a collective stand on the issue?

Kavaljit Singh works with Public Interest Research Centre, New Delhi (www.madhyam.org.in). He can be reached at kavaljit.singh@gmail.com

Global Research Articles by Kavaljit Singh

© Copyright Kavaljit Singh , Global Research, 2010

Disclaimer: The views expressed in this article are the sole responsibility of the author and do not necessarily reflect those of the Centre for Research on Globalization. The contents of this article are of sole responsibility of the author(s). The Centre for Research on Globalization will not be responsible or liable for any inaccurate or incorrect statements contained in this article.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in