LONDON, May 6 -- Asian nations should increasingly consider capital controls in their "policy toolkit" to manage inflows that are fueling inflation and creating asset bubbles, a United Nations agency said today. "The main short-term threat to growth in Asia and the Pacific is the return of inflationary pressures as recovery gathers steam," fuelled in part by an influx of money from outside the region, the Bangkok-based agency said in a report today. A stronger yuan "could be critically important" for boosting Chinese demand as traditional export markets in developed nations are slow to recover, the agency also said.
Taxes or deposit requirements may make it more expensive for global investors to buy Asian stocks, bonds and currencies, even as they help authorities damp surging asset prices. Brazil imposed a levy last year, Taiwan central bank Governor Perng Fai-nan said this week emerging markets should consider limits and Indonesia has studied the issue.
"Greater liquidity in the global financial system is finding its way to Asia-Pacific emerging markets," Noeleen Heyzer, executive secretary of the United Nations Economic and Social Commission for Asia and the Pacific, wrote in the report. She said in an interview today that the countries most at risk include China, India, Singapore, Indonesia and South Korea.
Heyzer added that "there is a growing consensus capital controls should be seen as important components of the policy toolkit." Countries should first monitor capital flows and "see whether there are other mechanisms in place" before imposing any capital limits, she said.
The region also has to "invest in itself" and reduce its reliance on "the debt-fuelled growth of the Western countries," she said in a Bloomberg Television interview.
Many Asian countries are increasingly looking toward China as a market, making the issue of regional currencies "extremely critical," she said. Asia Pacific economies will discuss exchange-rate coordination, an area that needs to improve, Heyzer added.
Equity and property prices in some markets have surged as the region's growth outpaces the rest of the world. The World Bank predicts as much as $800 billion in global capital flows this year, compared with about $450 billion to developing economies in the second half of 2009 at an annualized pace.
"Capital controls should be considered or adopted as warranted by economic and financial conditions in order to promote financial stability," Perng, who has headed Taiwan's central bank since 1998, said May 4.
A day later, Costa Rican Vice President-elect Luis Liberman said a surge in his nation's currency, the world's biggest gainer this year, is "worrisome" and he's in talks with the central bank and lenders to curb the advance.
India may attract large capital flows from overseas, posing a "challenge" for currency and monetary management, central bank Governor Duvvuri Subbarao said last month, adding that the country "may well employ" some form of capital controls on inflows should such investments surge.
The International Monetary Fund, which previously criticized capital controls, in February released a study saying limits on capital are a "legitimate" tool in some cases for governments facing an influx in investment that threatens to destabilize their economies.
The debate on capital controls comes more than a decade after the IMF called Malaysia's capital controls in 1998 "a step back." It also comes after an investor backlash after Thailand imposed curbs in December 2006 led the central bank to rescind some measures a day later.
The UN agency, known as UNESCAP, said the slow recovery in developed nations is making policy decisions more challenging for Asia. The region's growth remains dependent on monetary and fiscal support policies and has yet to become self-sustaining, and any "premature exit" can endanger the rebound, it said.
Asia's "rebound is fragile and it is uneven, and unless we can sustain it, it can transform itself from a V-shaped recovery to a double dip," Heyzer said. "This means managing inflation, managing the growing asset bubbles and also the appreciating exchange rate."
Some Asian central banks have started to withdraw monetary stimulus to stem inflation and avert asset bubbles. China has ordered banks to set aside more reserves three times this year, the Reserve Bank of India increased interest rates twice, and Malaysia boosted borrowing costs in March.
"The dilemma for the region is if they adopt a much tighter monetary policy than their major trading partners, in particular the U.S., it will attract capital inflows and further fuel the appreciation of Asian currencies against the dollar," the UNESCAP said. "As a result, exports may experience renewed difficulties."
The implementation of capital controls may be a less expensive method to control inflows, compared with building up reserves to buffer sudden outflows, the agency said. Methods can include administrative controls such as deposit requirements or levying financial transaction taxes, it said.
"Building up of reserves is costly because of potential exchange-rate losses as well as the loss in interest income from having to invest the funds in low-interest-earning foreign currency assets," the UNESCAP said.
The region's developing economies may expand 7 percent this year after growing 4 percent in 2009, the agency predicts.