Today in Capital Controls

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Yesterday I suggested that emerging market economies, rather than the United States, were better poised to criticize China's currency policy. It looks like, rather than criticizing China's policy, many are simply trying replicate it. Brazil and Taiwan are leading the way:

Asian currencies came under pressure on Thursday as a move from Brazil to further curb foreign inflows sparked fears that other countries would follow suit. Brazil moved overnight to close a loophole that had allowed investors to avoid a 2 per cent tax on foreign investment in equities and bonds announced last month.

Speculative flows have now reached the point where many emerging market currencies have hit levels that threaten to undermine their export sectors.

So far most emerging market economies have managed the problem by intervening in currency markets to slow the appreciation of their currencies. However, Brazil and Taiwan have taken more dramatic action, imposing capital controls designed to limit the appreciation of their currencies.

Speculation has risen that other countries will follow their lead.

“Recent measures from Brazil and Taiwan curbing capital inflows send a clear signal: emerging market policymakers are far away from accepting a sustained reallocation of portfolio capital from the west, and its liquidity and currency implications,” said David Bloom at HSBC.

Taiwan's decision to ban foreigners from putting money into time deposits seems to be working. Investors have pulled out roughly 12 percent of this 'hot' money. Taiwan's success, and Brazil's apparent determination, are likely to encourage others to take a more assertive stance.

Low interest rates in the West, coupled with a fixed renminbi and weaker dollar, have left many emerging markets somewhere between a rock and a hard place. They now must try to avoid excessive currency appreciation without appearing hostile to the foreign investment that is fueling much of their growth.

The global economy is unlikely to reach any sort of equilibrium for a very long time.

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