Asia may need capital controls

January 20, 2010
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, HONG KONG, Jan 20 – The IMF chief said Wednesday Asia may need to erect temporary capital controls, warning of the potential for new economic bubbles as speculative money floods into the region.

Dominique Strauss-Kahn said the global economy looked on course to beat the 3.1 percent growth forecast currently expected by the International Monetary Fund for 2010, as a post-crisis recovery accelerates.

Speaking in Hong Kong, the IMF managing director also reiterated his call for China to boost the value of its currency, the yuan, which critics say is kept artificially low to boost Chinese exports.

There is broad concern about the influx of foreign money pouring into Asia — which has sent property prices rocketing in Hong Kong, Singapore and mainland China — as the region leads the recovery.

Strauss-Kahn said the cash flowing into Asia was in stark contrast to the global financial crisis when the fear was of money drying up.

"Understandably, however, policymakers in recipient countries are concerned now with how to manage these flows — their impact on exchange rates, domestic demand, financial stability — and the danger of asset bubbles," he said.

Strauss-Kahn said options to discourage the inflow included cutting interest rates, accumulating reserves or tightening fiscal policy.

He added: "Capital controls can also play a role, particularly where the surge in capital flows is expected to be temporary, or where exchange rate overshooting is a real danger.

"As long as it\’s temporary, it may be the only way" to ward off a bubble, Strauss-Kahn told the Asian Financial Forum, a gathering of political and business leaders.

And in a veiled comment on China, he said: "In many countries, exchange-rate appreciation should be the key response — especially in those where the exchange rate is undervalued."

In a statement after his speech Wednesday, Strauss-Kahn said he had told Hong Kong officials that money pouring into the former British colony "could lead to rapid credit growth that in turn unduly drives up asset prices and creates macroeconomic volatility."

Malaysia was ridiculed by financial institutions and foreign governments in 1998 when it became the first crisis-hit Asian country to roll out capital controls to protect its financial markets and collapsing currency.

But the measures, including pegging the ringgit to the dollar and barring investors from taking money out of Malaysia, were later hailed by the IMF and other free-market proponents as an effective tool against speculation.

Economies worldwide went into a tailspin in late 2008 when credit dried up due largely to the collapse of a US property bubble.

But Strauss-Kahn said some emerging economies could begin exiting stimulus programmes sooner than rich countries, with world growth likely to outstrip the IMF\’s forecast figure of 3.1 percent this year.

Excluding Japan, Asia may expand by more than seven percent, the IMF boss said.

He again dismissed fears of a "double-dip" recession for the world economy, but said the pace of recovery had been uneven with Asia bouncing back faster than the rest of the world.

The region must also look at boosting domestic demand to cut its reliance on foreign consumers, especially in the hard-hit United States, he said.

Strauss-Kahn said world leaders should press on with financial reforms to prevent a repeat of last year\’s credit crisis, including better regulation and oversight of the banking sector.

"We need reform and we need political will," he said.

"There is still a lot to do… My concern is that in six to 12 months, everybody will be back to business as usual and will have forgotten the lessons of the financial crisis."

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