Taiwan moves to slow international hot money

By PETER ENAV

posted: 16 DAYS 23 HOURS AGO

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TAIPEI, Taiwan -Taiwan has banned foreign investors from placing money in certain bank accounts, the latest move by developing countries to slow an influx of international hot money created by massive government stimulus measures around the world.

Tuesday's measures from Taiwan's Financial Supervisory Commission come after the island's central bank warned against the tide of foreign funds flowing into the country. The bank said the amount of money invested by foreigners — about New Taiwan dollars 500 billion ($15.5 billion) — was five times the acceptable level.

The new rules bar foreign investors from sinking money into time bank deposits, as well as extending them when they mature.

The move comes as developing economies are getting hit with substantial foreign capital inflows brought on by monetary easing everywhere to fight the global downturn.

Fast-growing economies from Asia to South America can be especially vulnerable to an influx of foreign investment, which can drive up local currencies and undermine the competitiveness of these countries' exports. Too much foreign money can also create dangerous bubbles in stock, real estate and other asset markets. A sudden outflow of foreign funds, meanwhile, can cripple a country as international investors exchange back into U.S. dollars and leave the local economy short of greenbacks.

Last month, Brazil slapped a 2 percent financial transaction tax on foreign investment flows in a move intended partly to curb the rise in the value of the Brazilian real against the dollar.

In South Korea, the country is not currently considering any curbs on foreign currency liquidity at the local branches of foreign banks, said Ernst Lee, a spokesman at the Financial Services Commission. However, South Korea has taken the issue of how to protect emerging economies from foreign currency shortfalls — which can be caused by foreign investors pulling money out — during times of financial crisis to the Financial Stability Board.

The FSB is an international group of central bankers and regulators that was established by G-20 leaders at their April summit.

South Korea suffered a currency crisis in late 1997 when foreign investors stampeded out of the country, part of the broader Asian financial crisis that swept through the region and earlier toppled the Thai and Indonesian economies after a heavy outflow of foreign funds. Thailand, Indonesia and South Korea all received bailouts arranged by the International Monetary Fund.

South Korea came close to another crisis last year amid the global financial meltdown when dollar liquidity dried up and left local banks scrambling to service loans they had taken out in foreign currencies.

Despite Taiwan's measure, some questioned whether the export-reliant country would succeed in holding down the value of the New Taiwan dollar.

"I think the currency will keep rising because the economy is poised to grow and there's expanding business with China," said Doug Waraksa of Taipei-based SinoPac Security. "But it will help with volatility."

In the past six months the currency has gained 1.8 percent vis a vis the American dollar. However, it has been prone to significant fluctuations. The local stock market, meanwhile, has surged more than 65 percent since the start of the year.

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AP Business Writer Kelly Olsen contributed to this report from Seoul, South Korea.

2009-11-11 06:58:21