Financial Regulatory Forum

By Kevin Plumberg

HONG KONG, July 5 (Reuters) – Having learned lessons from the past, emerging Asia is showing caution about adopting heavy-handed capital controls to curb heavy investment inflows and is focusing instead on closing economically disruptive loopholes.

Measures announced by Indonesia and South Korea last month targetted particular areas of their markets, unlike Thailand in 2006 which effectively imposed a blanket tax on foreign investment. A Reuters poll suggests further targetted measures can be expected from the region.

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HONG KONG, June 30 (Reuters) – Pledges in advanced economies to keep interest rates low for a long time have sent abundant liquidity looking for a home in emerging markets and other high growth areas.

But some policymakers are concerned that the inflows could prove destabilising and so have taken action.

Indonesia enacted a new set of controls this year, following moves by Brazil and Taiwan last year. South Korea has outlined a set of policies on currency derivates trading.

By Andrey Ostroukh

MOSCOW, May 14 (Reuters) – Russia, worried that the rallying rouble will hurt the economy, is moving to discourage inflows of hot cash and cap foreign borrowing, but without full scale capital controls they will at best slow down the appreciation.

Adjusted for inflation, the Russian rouble is already back to pre-crisis levels while gross domestic product (GDP) is not expected to recover to such a point until at least 2012.

Discussions on capital controls in Russia intensified after the International Monetary Fund urged Moscow to be ready to guard against excessive capital inflows and consider a range of measures, not excluding capital controls. [ID:nLDE64A0QV]

TAIPEI, Jan 7 (Reuters) – Taiwan is considering banning foreign funds from buying bonds, a local newspaper reported on Thursday, as regulators and the central bank ratchet up pressure on currency speculation they fear could damage the economy.

The move was aimed at stopping foreign investors from using the bond market to speculate on the Taiwan dollar, the Chinese-language Commercial Times reported on Thursday, citing a central bank official.

“The central bank does not welcome that,” Spencer Lin, head of the central bank’s foreign exchange bureau, was quoted as saying, when asked if foreign funds could invest in bonds.

MOSCOW, Dec 31 (Reuters) – Russia will step up its efforts to curb the influx of speculative capital, which can flee the country with the “first rain,” Prime Minister Vladimir Putin said this week, adding the measures will be moderate.

“There will be no revolutions,” Putin said.

Nonetheless, his remarks pushed the rouble considerably down, as investors were easily spooked by hint the government might take steps soon.

The comments have intensified the talk on capital controls, which began earlier this autumn when a new wave of short-term capital entered the Russian forex market, driving the rouble rapidly up.

   By Gleb Bryanski
   VLADIVOSTOK, Russia, Dec 29 (Reuters) — Russia will moderately step up efforts to curb speculative capital, while gradually moving its economy to a free float rouble exchange regime, Prime Minister Vladimir Putin said on Tuesday.
   “We need to correct the rules so it is less interesting for speculative capital to come running into Russia,” Putin told reporters. “There will be no revolutions.”
   The prime minister also said Russia’s commodity-dependent economy was not ready for a fully floating rouble exchange rate.
   “As the economy diversifies, we will be transitioning to a free float, and this ought to be one of the measures that would remove supportive conditions for speculative capital,” he said.
   Speaking to reporters on a visit to the port city of Vladivostok in Russia’s far east, Putin added the departure from a controlled exchange rate regime would be “mild”.
   Officials have previously said they are considering “soft” measures to limit speculative inflows, with the Kremlin reiterating recently that there is no need for tougher moves like a Brazilian-style tax on capital inflows. 

   In September, Putin pledged to keep a “liberal regime” on capital flows, saying it was a key factor in spurring investment in Russia.
     Russia lifted restrictions on capital flows in 2006, which resulted in massive inflows of “hot money” that inflated corporate debt to $450 billion in 2008, pushed the rouble sharply up and spiked inflation rates. 
   The economic crisis that hit Russia last year lead to capital flight of $130 billion in 2008 and the rouble shedding nearly a third of its value.
   “We have existing problems, which are related to the fact that we have created good conditions for speculative capital inflows,” Putin said. “It flows in quite well, works here, but creates problems, because if crisis hits, it leaves quickly.”
   An improving global economic outlook in recent months, combined with relatively strong oil prices have renewed interest among investors in the Russian rouble and other emerging markets currencies that are riskier but offer higher returns.
   As a result, in the autumn the rouble regained nearly half of its value lost in last year’s crisis. The currency has moderated somewhat in recent weeks, but the autumnal rally prompted talk of re-introducing some form of capital controls.
   After Brazil imposed its tax in October, Russia was considered the most vulnerable of the BRIC countries when it comes to foreign capital.
   Putin said the task of the government is to attract funds, but not the ones that would run away with the “first rain”.
   “We have to create supportive conditions for inflows of long-term foreign direct investment,” Putin said.
   FDI into Russia was down 48 percent in the first nine months of the year, totalling only $10 billion, according to data from the Federal Statistics Service. (Reporting by Gleb Bryanski; Writing by Lidia Kelly, editing by Mike Peacock)
 ((lidia.kelly@reuters.com; Tel: +7495 7751242))