Sunday, October 17, 2010
Flood of Money Propelling Asia Into Political Minefield
A tidal wave of speculative money pouring into Asia is driving up regional currencies, stoking political tensions in the run-up to crunch summits as nations raise the barricades to protect exports.
While the influx of foreign capital reflects investor confidence in a region that escaped the worst of the world economic crisis, it is making Asian goods more expensive on global markets and fanning fears of asset bubbles.
South Korea, where finance ministers from the Group of 20 nations meet this week to prepare for a November summit — has warned that currency upheaval frictions are growing and could lead to trade protectionism.
The United States, facing mid-term elections next month, has ratcheted up pressure on China to let the yuan rise more rapidly, but Beijing insists its currency must not be used as a “scapegoat” for US economic woes.
The dollar has slumped on expectations that the US central bank will print more money to inject cash into its banking system and stimulate growth, diluting the value of the currency.
With Beijing keeping a tight grip on the yuan, many other Asian economies are suffering as their currencies soar against the dollar. Despite Europe’s debt woes, the euro has also surged.
While Indonesia is enjoying a rupiah that has strengthened 5 percent this year, mainly because the bulk of its exports are commodity-based and priced in dollars, other countries are not.
Concerned about rising consumer prices, Singapore on Thursday tightened monetary policy to cool inflation, pushing its currency up to a record high against the greenback.
Thailand has also moved to stem capital inflows after a 10 percent jump in the value of the baht over the past year, slapping a tax on foreigners investing in bonds, on the heels of a similar move by Brazil.
Such actions are fomenting fears of a “currency war” heading into the G-20 meetings and summits of Asian leaders in the coming weeks.
The Washington-based Institute of International Finance estimates that net private capital flows to emerging economies will hit $825 billion this year, up from $581 billion in 2009. Of that, almost $343 billion is predicted to flood into emerging Asia, up from $337 billion last year and roughly $122 billion in 2008.
This wall of money is causing a headache for Asian central bankers who would like to raise interest rates to control inflation but fear doing so will attract more investors seeking higher returns.
“The fallout from a cheap dollar and the artificially weak yuan is being felt across the emerging world,” said Jane Foley, a senior forex strategist at Rabobank International in London.
“It may go against the concept of free trade but it is easy to understand why some governments including Brazil, Thailand and South Korea have resorted to intervention in an attempt to offset some of these inflows.”
Reluctant to impose draconian measures that could spook markets, Asian policy makers appear to have limited tools at their disposal to curb the money inflows.
In Thailand, where new capital controls in 2006 sparked a plunge in the stock market, Prime Minister Abhisit Vejjajiva has said aggressive currency intervention would be costly and ineffective.
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