Developing Asia must step up its surveillance of the
financial sector and impose controls on capital inflows,
experts warned yesterday, as surging foreign investment
threatens to create asset bubbles and volatility in the
Masahiro Kawai, head of the Asian Development Bank
Institute, told Emerging Markets in Tashkent
yesterday: Capital inflows will be very large in the
coming years which will pose a huge challenge for the
region as the risk of asset bubbles has increased.
Asias high growth prospects and low government debt
has boosted the regions appeal as a new safe haven, Kawai
said. Meanwhile, historically-low US and eurozone interest
rates will encourage investors to search for yield in Asia.
Kawai said Asian policymakers should monitor the
domestic financial sector for foreign debt and foreign currency
exposures as well as the lending practices and
liabilities of foreign financial firms operating in
He said Asian banking authorities should follow
Brazils lead in ordering listed and non-listed companies
to disclose and register derivatives transactions related to
foreign loans. This would allow policymakers to assess the
systemic risk of domestic companies.
Brazil imposed a 2% capital tax on foreign investments in
the countrys stock and debt market last year, to ward off
speculative inflows and curb currency strength.
Kawai said the positive market reaction to the Brazil move
contrasts sharply with the December 2006 imposition of capital
controls in Thailand that sparked a stock market slump in the
country. Asian countries should look at the success of
the Brazil move and consider how to adopt that approach in
Gerard Lyons, chief economist at Standard Chartered, said
yesterday that larger countries such as India and China
could get away with strong capital controls without
Although the IMF has signalled greater tolerance for capital
controls, it has failed to explain when governments
should impose capital controls and what type of controls should
be implemented, Lyons said.
The IMF and ADB should draw up a code of
practice on how and when to implement
targeted controls depending on the type of capital
inflows, Lyons argued. This would signal to the market the
likelihood of greater capital controls and the form it might
take such the level of punitive taxes on foreign
The Institute for International Finance has said that
emerging Asia will dominate private capital inflows in the
coming years. The IIF calculated that net private flows to Asia
rose from $171 billion in 2008 to $191 billion in 2009.
Asset bubbles are already taking shape in the high-end
property markets in Hong Kong, Macau, Taiwan and mainland
China, and in the Mumbai commercial property market, analysts
said. And fears are growing that foreign investors could tip
Indian and Indonesia stocks into bubble territory.
But despite the near-term move to impose capital controls in
Asia, Kawai said that policymakers, in the long term, must
liberalize capital accounts to boost returns on domestic
savings and ensure regional exchanges rates can be used
for settlement purposes in cross-border trade.