Malaysian Currency Controls Raise Concern 
International Herald Tribune
October 1, 1998
Michael Richardson

With the arrival of the Thursday deadline imposed by Malaysia for the forced repatriation of an estimated 20 billion ringgit ($5.27 billion) held outside the country, a major policy debate in several countries is intensifying over whether economies and financial markets should be re-regulated or left largely unfettered.

In the view of many analysts, Malaysia's recent introduction of sweeping controls to prevent foreign speculation in its currency and stocks, including the withdrawal of the ringgit from international circulation, marks a significant retreat from the prevailing free-market ideology in Asia.

Kenneth Courtis, strategist and chief economist for Deutsche Bank in Tokyo, said the move was "the broadest reversal we have seen in two decades" in Asian attitudes toward the free market.

Malaysian policies have heightened concern among free-market advocates, including the International Monetary Fund, that other nations, hit by financial crises, recession and rising unemployment in Asia, Russia and Latin America, will also impose tight controls to protect their economies and currencies.

Martin Khor, an economist who serves as director of the Third World Network of nongovernmental organizations in Penang, Malaysia, said the Malaysian measures marked "the beginning of a shift of opinion" regarding the ultimate benefits and costs of allowing financial markets to operate in a laissez-faire manner.

He added, "The tide that has made an orthodoxy of deregulation and absolute freedom to financial operators is now beginning to turn."

Singapore's senior minister, Lee Kuan Yew, said developing countries were watching to see which economic model — the IMF-prescribed free market or capital controls — succeeded in bringing about economic recovery in Asia.

He said that if Thailand and South Korea, both of which were getting billions of dollars in international loans in exchange for an agreement to undertake extensive economic reforms and maintain freely convertible currencies, recovered in two or three years, the "level, open system" would prove itself.

But Mr. Lee told a recent meeting of the Foreign Correspondents Association that if Thailand and South Korea failed because of their own weaknesses or because the IMF package was inadequate, "then I feel we are going to have a backing away" from a globalized financial system.

"Countries will hesitate," he said, "and say, 'Why open?"'

He added that if Malaysia succeeded, "then that system will triumph with the developing countries."

Hong Kong and Taiwan, both considered free-market bastions, acted to curb speculative activity in their markets even before Kuala Lumpur clamped capital controls on Malaysia similar to those that have long existed in China.

In August, the Hong Kong government ordered its monetary authority to start buying in the local stock and futures market. Analysts estimate that such buying amounts so far to about 100 billion Hong Kong dollars ($12.91 billion)

Officials said that the buying was not intended to prop up the markets. Instead, they said the authority wanted to foil investors who were attacking the Hong Kong dollar to break its fixed peg to the U.S. dollar and drive up interest rates so that they could sell stocks they did not own on the futures market in anticipation of being able to buy them back more cheaply later.

Also in August, Taiwan tightened controls over illegal trading of foreign hedge funds that had been blamed for causing the local stock market to fall.

Faced with a relentless slide in the value of its currency and soaring interest rates, both of which the government of Prime Minister Mahathir bin Mohamad attributed primarily to foreign speculators, Malaysia in September pegged the ringgit at 3.80 to the U.S. dollar. The government also warned that ringgit-denominated financial assets would have to be repatriated by Thursday.

The government said the ringgit would continue to be readily convertible to foreign currencies for trade purposes and direct investment by foreigners. But new regulations have been imposed to prevent foreign "speculation or manipulation" of the Malaysian currency or shares. They include a ban on trading Malaysian stocks in Singapore and a rule that nonresidents who purchase Malaysian stocks will have to retain them, or the proceeds from their sale, for a year before remitting the funds abroad.

Already, some influential business groups and officials in Indonesia, the third East Asian country receiving IMF loans on condition it undertake free-market reforms, are urging the government to follow Malaysia's lead and introduce foreign-exchange controls.

For the time being at least, senior Indonesian officials have ruled out such a course. The coordinating minister for finance, economy and industry, Ginandjar Kartasasmita, said that when inflation is high and foreign-exchange reserves small, "capital controls may only trigger capital flight."

That appears to be what is now happening in China, which called Monday for companies to repatriate foreign currency held overseas by Thursday.

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