Taiwan Takes A Step in Brazil's Direction

Taiwan's Financial Supervisory Commission announced that effective immediately foreign investors were banned from parking funds in time deposits. Moreover foreign investors cannot extend their existing time deposits when they mature. The ostensible reason for the ban is to curb currency speculation, according to officials. As of the end of October, there was an estimated NT$500 bln of foreign investment in time deposits, something on the magnitude of five times more than officials would be comfortable with.

Among Asian countries, foreign investors have been among the most aggressive in buying Taiwanese shares. According to the local stock exchange, foreign inflows into equities is running almost 173% above the same year ago period. Today's curb is not aimed at discouraging this but purer currency speculation.

The Taiwanese dollar has not appreciated much this year. The 1.4% rise against the US dollar makes it among the worst performers in emerging Asia this year. The Philippine peso is up 1.3% and is the only floating currency that has under-performed Taiwan in the region. This makes the ban on foreign investment in time deposits to curb currency speculation a bit of an exaggerated response. On the other hand, the fact that reserves have increased by almost 23% this year suggests that the muted currency rise may also be reflective of the success of intervention and currency management.

Nevertheless, first Brazil and now Taiwan are moving up the escalation ladder trying to curb the undesirable impact of hot money. With the new found love affair with emerging markets, too much of a good thing is dangerous. Many developing countries do not have the capacity to absorb the deluge of foreign investment.

There is a prisoners dilemma of sorts at work. Successful implementation of capital controls may deflect the hot money flows other countries and exacerbate their challenges. At the same time, it is not clear how effective Brazil and Taiwan's measures will be. Brazil's stock market is up 3.27% over the past month, outperforming most equity markets, but China. And, net-net the currency is little changed, though perhaps a bit more volatile. Given the muted gains in the Taiwanese dollar, it will be difficult to measure the effectiveness of the measure, even if foreigners can no long place funds in time deposits.

That said, other candidates for capital controls would seem to be in Asia, though from time to time, there has been speculation that South Africa would consider such measures if the rand were to continue to appreciate.