Asia stiffens resolve to stem capital inflows

After the failure of a weekend International Monetary Fund meeting to defuse escalating forex tensions, Asian governments are redoubling efforts to resist capital inflows that are boosting their currencies and undercutting the competitiveness of their exporters.

Thailand’s cabinet agreed to impose a 15 per cent withholding tax on capital gains and interest income from foreign investment in government debt in a bid to curb the baht, which is at its highest since the 1997 Asian financial crisis. With the dollar hovering near 15-year lows against the yen, Japan said it would wade into the foreign exchange market again if need be, despite widespread disapproval by its peers of a bout of dollar buying last month.

And the People’s Bank of China applied the brakes to the yuan by setting a weaker midpoint reference rate for the day’s trading, while its foreign exchange arm said currency reform did not equate to yuan appreciation. China’s insistence that the yuan’s rise must be gradual is a huge obstacle to the appreciation in Asian exchange rates policymakers say is needed to reduce global imbalances.

It, and other countries, counter that the prospect of the Federal Reserve printing money again will flood the world economy with more liquidity, weaken the dollar and push emerging currencies yet higher as investors search for returns with interest rates in the developed world at record lows.

Minutes of the Fed’s last policy meeting — at which it said it stood ready to provide more support for a stuttering economy — are due soon. “The Fed minutes will be crucial as we could learn more about the size of potential asset purchases,” said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi.

A second round of quantitative easing by the U.S. central bank would pile more pressure on an already languishing dollar.Britain too could embark on a second round of asset buying with new money although a Bank of England policymaker said he and his colleagues faced competing risks of not doing enough to curb inflation versus tightening policy too soon.

Decisive steps

The announcement by Thailand came a week after Brazil doubled a tax on foreign portfolio inflows into bonds and some other financial instruments to 4 per cent to reduce upward pressure on the real, its currency.

The baht has risen 11 per cent this year, the second strongest currency in Asia after the yen, pushed up in part by foreign inflows into Thai assets. Japanese FM Yoshihiko Noda said he had explained to a weekend meeting of the Group of Seven industrial countries in Washington that Tokyo had intervened on September 15 to prevent destabilizing lurches in exchange rates.

“The G7 reaffirmed that excessive currency moves would hurt stability in the economy and in the financial system ... From this standpoint we will take decisive steps, including intervention, when needed,”said Noda. With many governments acting against currency appreciation, fears are mounting of a “race to the bottom” that may trigger protectionist trade tariffs that would hobble global growth.

The US House of Representatives has already passed a bill that would authorize retaliation against China for holding down the value of the yuan. US Treasury Secretary Timothy Geithner is due to determine by October 15 whether China is “manipulating” its currency to gain an unfair trade advantage.

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