(James Saft is a Reuters columnist. The opinions expressed are his own)

Easy money in the United States, a falling dollar and growing flows of funds seeking better returns in emerging markets are touching off a new round of capital controls in hot emerging markets, a trend that could accelerate and will at the very least increase market volatility.

It shouldn’t be a surprise, really; loose money in the developed world is helping to spur investment into emerging markets, driving currencies up and making local exports less competitive for countries which, unlike China, aren’t hitching a free ride as the dollar declines.

Inflation may be a threat for many of these, but with the global economy still struggling, it certainly won’t feel that way to policy makers.

Russia on Wednesday joined the list of countries eyeing new measures to stem currency speculation and appreciation. Moscow was careful to say it would not impose actual capital controls, which seek to regulate flows of funds into or out of an economy, but the measures they are considering would have exactly that effect, making it tougher or more expensive for money borrowed abroad to be brought into Russia.

Kazakhstan, which has been intervening actively to slow the ascent of its tenge currency, has introduced legislation allowing capital controls, but so far has not used them.

Indonesia said this week it will consider curbs on foreign holdings of short-term official debt, sending its rupiah into a brief swoon until central banker Hartadi Sarwono damped things down by saying currency moves based on such flows were so far manageable.

Elsewhere all across developing Asia central banks have been intervening to cap gains in the value of their currencies, with Taiwan going so far as to ban foreign funds from investing in local time deposits.

Brazil last month announced a 2 percent tax on foreign investment in stocks and fixed-income securities to limit the strengthening of the real.

International Monetary Fund chief Dominique Strauss-Kahn gave the fund’s standard line to the Financial Times: “The IMF would not recommend them as a standard prescription … as they carried costs and were usually ineffective”.

FIGHTING OVER SCRAPS

Ineffective over the long run they may be, but tempting they are in the short term. The very fact that India and China have emerged relatively well from the crisis and have resumed growth in strong fashion gives courage to those considering their own measures. And really, the very idea of an orthodox allegiance to free flowing markets ensuring the best outcome for all now looks pretty 1999. Malaysia attracted a firestorm of criticism when it imposed controls in the wake of the Asian crisis in the 1990s. There was much talk of how investors would go away and not come back, how development would be retarded and Malaysia ultimately would rue the day. None of that has come to pass, and those same investors proved quite willing to come back if the returns looked good enough, as indeed they did.

But Malaysia, along with Chile, were outliers when they imposed capital controls. What will it mean if it becomes not a tool of desperation but a standard policy when hot money flows? There must be a risk that capital controls become part of an escalating series of beggar-thy-neighbor steps taken by countries fighting over the scraps of a diminished U.S. and European appetite for imported goods.

If, in other words, these controls are a temporary phase to ease the transition to stronger currencies, the risks might not be that high. I’d worry that developed market interest rates are going to stay low for a very long time. That means that the grand emerging markets carry trade of borrowing in dollar to speculate for appreciation elsewhere will, as it did in Japan, build and build.

At the same time you have to look at why interest rates will stay so low for so long. My bet is that it is because consumption in the developed world will be under structural pressure as debts are repaid. So the money flows into emerging markets and drives up currencies, but unless domestic consumption in China and India really takes off there will not be a very good market for exports. That will make newly strong emerging market currencies all the harder for those countries to tolerate, economically and politically. If China does not do its part and allow its currency to appreciate, the argument will be all the more stark.

It may or may not be a good idea, but one thing I would not count on is coordinated and globally sanctioned capital controls, as espoused by Arvind Subramanian, a senior fellow of the Peterson Institute.

The U.S. simply won’t wear it.

Look then for more unilateral controls and more volatility as speculation of all kinds grows.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)

– Wei Gu is a Reuters columnist. The opinions expressed are her own –

China has talked about plans to allow foreign companies to float on its domestic stock markets for at least a decade, but that’s all there has been: talk.

Now would be a good time to convert some of that talk into action. Beijing has been struggling with its own investment strategies: the state gets feeble returns on the U.S. Treasury bonds it owns, and its equity stakes in foreign financial firms are well under water.

So why not diversify by allowing 1.3 billion Chinese citizens have a go rather than a few bureaucrats working for China’s sovereign fund? The many might even do better than the few. And it would give Chinese savers a chance to buy global blue chips at credit-crunch prices.

The idea of opening up China’s equity markets to foreigners may seem fanciful, but it dovetails with another big national objective. China wants to build Shanghai into a global financial centre by 2020, but that requires a deeper and internationalised equity market. Only when that is in place will foreign money descend on Shanghai, together with an army of bankers, lawyers and accountants.

The market capitalisation of Shanghai is now the world’s fourth largest, but it is dominated by state-owned firms with only a handful of foreign joint ventures and a few private companies.

The market is off-limits even to many of China’s own best and biggest companies, such as the world’s largest telecom operator China Mobile and China’s top offshore oil and gas producer CNOOC.

They are listed in the offshore market of Hong Kong and despite their expressed interest to return to the mainland, continue to fail to win the green light from Beijing.

Indeed there is no other country which relies more heavily on offshore financing than China. One fifth of the foreign companies listed on Nasdaq are from China, the largest percentage in the world. By pushing its top companies to list abroad, China has gained foreign capital at the expense of the development of its equity market.

Meanwhile back in Shanghai too much money is chasing too few good listed companies. The same companies are often valued at a premium in the mainland versus in Hong Kong.

Chinese investors need more and better investment opportunities. China needs to realise the competition of the 21st Century is not just about amassing capital, but also about building companies that can create wealth.

WHO COMES FIRST?

In the past decade, most of the barriers to open equity markets have been removed. China completed a share reform programme that allowed formerly untradeable state-owned shares to trade, and China’s accounting rules are now similar to global standards.

A big block remains in the shape of China’s capital controls, which prevent firms from repatriating profits, but the State Administration of Foreign Exchange recently said it will consider relaxing the controls once foreign companies are allowed to list.

When China first talked about introducing foreign listed companies a decade ago, Unilever, whose Lux soap 20 years ago was as coveted in China as Louis Vuitton bags are now, was expected to be the first.

Although that seems unlikely now, multinational manufacturers are still expected to be interested in the hope that a China listing can raise their profile in what is seen as potentially their biggest market.

Instead, first in line will probably be foreign banks keen to raise money in China to fund their local operations. As things stand, their yuan deposit base is too small due to their limited branch network.

HSBC is said by British officials to be in discussions to be the first foreign company to go public in China. The bank, with a Shanghai branch office that opened some 150 years ago, has gained a lot of goodwill for promising not to sell its strategic investment in Bank of Communications while other foreign banks rushed to the exits.

A full listing of foreign companies will offer an upside for China Inc. in that domestic firms with global ambitions will be able to bid for firms using their own shares and Chinese shareholders will have a say on global deals.

In addition, by allowing the Chinese to buy a piece of the world’s blue chips on their home soil, the change will assist in the country’s ambitions to make the yuan an international currency while keeping a certain amount of capital controls.

China’s leaders have made clear they see the credit crisis creating opportunities to flex their financial muscles. Here’s one opportunity they shouldn’t let pass them by.

– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund –

– Wei Gu is a Reuters columnist. The opinions expressed are her own –

When foreign strategic investors were invited to take stakes in Chinese banks, the word “strategic” had a clear meaning for their hosts.

The banks were supposed to stay in for the long term, and that’s why they had the chance to buy big stakes at bargain prices. Yet many have behaved like “foreign speculative investors”, as they are now called in China — they took the cheap deal and then flipped the shares for a fast profit.

Chinese banks looked to the West for access to capital, risk management and exposure to fast growing and sexy new products. But now China no longer needs as much foreign investment.

Meanwhile some of the fancy new financial products China once craved have turned out to be toxic, and the risk management skills of the so-called teachers from the West look tarnished in the wake of the credit crunch.

The recent exodus by cash-strapped Western banks such as RBS, BofA, and UBS, all of whom sold out of Chinese banks for fat profits, has left behind a sour taste.

LAST OF THE BIG 5

Beijing should reflect on this as it prepares the last of the big 5 state-owned lenders to go public. Does the Bank of Agriculture really need strategic investors at all?

And if so, should it exclude local strategic investors, as the other Chinese banks did, in the name of attracting foreign capital and expertise?

There are strong arguments for changing tack. If foreign banks haven’t really delivered the goods, there is little point in bending over backwards to secure their involvement, especially when only a handful of Western banks can afford a substantial investment in AgBank.

With assets of 7 trillion yuan ($1 trillion) it is the second largest bank in China. It would therefore make sense to open the door for domestic companies to bid for Agbank’s shares.

There would be no shortage of interest. Chinese financial institutions have some of the strongest balance sheets in the world and are eager to find new investment targets.

Domestic commercial banks are unlikely to get a stake at AgBank for competition reasons, but China Investment Corp. (CIC), the Social Security Fund and China Life could be interested.

CIC already owns half of AgBank through Central Huijin, its wholly-owned subsidiary. While it would not necessarily bring AgBank much in terms of banking technology or risk management, an investment would allow China to use its reserves to fund domestic investment.

China Life, on the other hand, could be an partner as well as an investor. Chinese banks have become a vital distributor of insurance policies. AgBank can help China Life tap into a market of 700 million farmers, equal to twice the U.S. population.

Chinese financial firms all have ambitions to become financial conglomerates, and a strategic investment will help China Life, and probably AgBank too, get closer to that goal.

Of course, just because you stop favoring foreign investors doesn’t mean you should start favoring the locals. The right answer is to favor no-one.

That would allow real price competition for the shares, meaning that the most likely winners would be those institutions that most valued the relationship. Moreover, a proper competition would not leave too much money on the table and would be fair for future common investors.

OLD THINKING

That said, the powers that be still seem to be hung up on old thinking. Despite the credit crunch, Western banks are still regarded as superior by many in China. Xiang Junbo, the chairman of AgBank, said in a recent interview with Asian Banker that he still believed foreign strategic investors would bring “advanced concepts, risk management models and microfinance experiences.”

Yet it is far from clear that sophisticated Western institutions have that much to teach AgBank, which is dealing with a large, relatively poor clientele. For instance, if AgBank really wants to learn about microfinance, it would probably do better to engage microfinance pioneer and Nobel laureate Muhammad Yunus as a consultant rather than, say, to bring in the French bank, Credit Agricole, as a shareholder.

To use a Chinese idiom — Chinese banks and their foreign strategic investors have been sleeping in the same bed but dreaming differently. The Chinese hoped to learn from the Westerners but never fully trusted them, while the Westerners planned to use the partnership to build their own franchise in China. The credit crunch has merely laid bare these differences.

TIGHTER SELECTION CRITERIA

Facing the backlash against foreign investors, Xiang said he would tighten the selection criteria applied to foreign investors, probably extending the lock-up period from three to six years. Foreign bidders for a stake in AgBank must be financially strong, and be experienced in agriculture, rural area business and microfinance loan extension, he said.

This has effectively weeded out almost all Western interest, leaving China with limited negotiating power — surely another argument for widening the net to domestic bidders.

AgBank does not need a foreign sugar daddy to get its IPO away. True, it has traditionally been the weakest among the big five state-owned banks for a good reason: AgBank shoulders a social responsibility to lend to the largest disadvantaged group in the world. But as the success of microfinance in Bangladesh has demonstrated, lending to the rural poor can be a lucrative business if it is done well.

AgBank reckons that the profit of lending 1 billion yuan in rural areas is equal to lending 1.6 billion in urban areas, because it can command a higher interest rate.

China is focusing on boosting rural demand, and AgBank can benefit from this process. The land reform will give the rural population more rights over the land.

As this happens they will be able to borrow more money using land as a collateral — something that should boost lending. That is a good story to tell public investors. Gone are the days that Chinese lenders need a foreign label to help sell shares. The AgBank IPO is a chance to drive home this point.