Surging capital inflows threaten Asia’s economic stability

Tuesday, 19 October 2010 23:35 -     - {{hitsCtrl.values.hits}}

Reuters) - Surging capital inflows threaten Asia’s economic stability, the World Bank warned on Tuesday, a day after U.S. Treasury Secretary Timothy Geithner sought to draw the venom from a global row over currencies by vowing not to devalue the dollar.

The World Bank buttressed the argument made by China and others that U.S. policies are sending a wave of cash flowing into higher-yielding emerging markets, undermining their export competitiveness and pumping up inflation and asset bubbles.

“We are seeing an effort by developing East Asia to deal with the large amounts of liquidity driven in very large part by the monetary policy easing in the United States,” Vikram Nehru, the bank’s chief economist for Asia-Pacific, told reporters in Tokyo.

Nehru, presenting a semi-annual report, urged policymakers to learn the lessons of the 1997/98 Asian financial crisis, when an influx of footloose global capital inflated property and equity prices, only for them to collapse when the money flows reversed.

“The authorities in East Asia need to take adequate precautions to ensure that they do not repeat the same mistake twice in slightly over a decade,” the report said.

While capital controls were not very effective in controlling long-term investment flows, Asian countries had an array of instruments to deal with rising inflows, the World Bank said.

“If this liquidity abundance is sustained and increases, I think they are going have to take further action,” Nehru said.

Thailand introduced a withholding tax on foreign purchases of government bonds last week, and Brazil on Monday increased an existing tax on foreign bond buyers to 6 percent from 4 percent.

Foreign investors in Brazil will also have to pay more tax to trade currency derivatives, blamed in part for driving up the real, the country’s currency, to a two-year high.

“Our objective is to reduce foreign investment into Brazil,” Finance Minister Guido Mantega told reporters in Sao Paulo.


Strains over the constellation of exchange rates needed to put global growth on a more solid, sustainable footing are likely to dominate a meeting of finance ministers of the Group of 20 major economies in South Korea starting on Friday.

The dispute boils down essentially to the exchange rate of the yuan, also known as the renminbi.

The United States, supported by most economists, believes Beijing is unfairly holding the yuan down to give its exporters an advantage in global markets.

This is causing a broader misalignment of global currencies, Washington contends, because other developing countries are reluctant to lose competitiveness versus China by permitting their own currencies to appreciate in isolation.

Speaking in Palo Alto, California, Geithner said he believed China would continue to let the yuan rise to aid the rebalancing of its economy away from exports and toward domestic growth.

“You can’t know how far it should go. What you know now is that it’s significantly undervalued, which I think they acknowledge, and it’s better for them, and of course very important for us, that it move. And I think it’s going to continue to move,” Geithner said.

China would endorse that assessment. The disagreement arises over the pace of adjustment.

China says a spike in the yuan would drive many exporters to the wall, destroying millions of jobs, but would do nothing to address what it sees as America’s deteriorating competitiveness and shortfall in savings.

Basel III to ease in new bank liquidity rules

Reuters) - Global banking supervisors agreed on Tuesday to phase in the introduction of a key new global standard on lenders’ minimum short-term funding cover, handing further relief to a sector facing a hefty funding gap.

The Basel Committee of banking supervisors and central bankers from 27 countries met on Tuesday in South Korea, which is hosting the Group of 20 (G20) leading countries that had called for tougher capital and liquidity requirements in response to the financial crisis.

The committee had already agreed to a soft phase-in for its net stable funding ratio, which covers a bank’s longer-term liquidity. That measure will be trialled from 2012 and become mandatory in January 2018.

On Tuesday the committee said it would also adopt a gradual phase-in for its liquidity coverage ratio (LCR), which will require a bank to hold enough highly liquid assets to cover 30 days of net cash outflows.

The LCR observation period will start next year and the rule will become a minimum global standard in January 2015.

The rules have faced fierce opposition from banks, which say they would struggle to comply, and bankers said that, while a phase-in of the LCR had been expected, they welcomed confirmation of the delay.

“The Committee agreed on key details of the liquidity coverage ratio,” it said.

“It confirmed that both the LCR and the net stable funding ratio will be subject to an observation period and will include a review clause to address any unintended consequences.”

“The liquidity ratio and net stable funding ratio are some of the most difficult areas as international practices differ, “ said Pat Newberry, chair of the UK financial services practice at PWC.

“Giving themselves time to look and think carefully has to be a sensible move. If you tighten up liquidity regimes, what does that do to lending volumes? It’s much more difficult to forecast than with capital,” Newberry said.

The Basel Committee also said it would finalise by year end its proposal on the use of contingent capital, also known as CoCos, bail-in bonds and other non-equity loss-absorbent instruments to pad out a bank’s capital requirements.

“Getting clarity by the end of the year will help banks a lot to plan capital positions going forward,” Newberry said.

Banking industry officials said that banks in Germany and France would welcome the phasing-in of the new liquidity standards.

Britain’s Financial Services Authority has already proposed its own set of liquidity rules and now will come under pressure to align their introduction with the delayed Basel timetable to avoid market distortions.

Industry officials also welcomed the review clause which gives supervisors further wriggle room to delay the new rule if capital raising conditions worsen or other problems emerge.

The liquidity rules are part of a wider Basel III package which G20 leaders are set to endorse in Seoul next month.

The Basel Committee said it will publish a detailed text by year end setting out all the elements of the new capital and liquidity requirements.

Financial industry experts said this timetable signalled that Basel III was unlikely to undergo any further major changes.