Asia stiffens resolve to resist capital inflows

Asian governments reached for policy tools and rhetoric on Tuesday to resist capital inflows that are boosting their currencies and undercutting the competitiveness of their exporters.

Thailand's cabinet agreed to impose a 15 per cent withholding tax on capital gains and interest income from foreign investment in government debt in a bid to brake the baht, which has climbed to its highest level since the 1997 Asian financial crisis.

Japan said it would wade into the foreign exchange market anew if need be to weaken the yen, despite widespread disapproval by its rich-country peers of a rare bout of dollar buying last month.

And Beijing once again talked down the prospects of a faster rise in the yuan, even as it acknowledged that more money would pour into China over the rest of the year in anticipation that the currency would strengthen.

China's insistence that the yuan's rise must be gradual is a huge obstacle to the appreciation in Asian exchange rates that policymakers say are needed must to help reduce global economic imbalances. Countries that compete with China fear losing business if they unilaterally let their currencies rise.

The announcement by Thailand, which had been widely trailed, came a week after Brazil doubled a tax on foreign portfolio inflows into bonds and some other financial instruments to 4 percent to reduce upward pressure on the real, its currency.

 "It won't change its direction because the strong baht is in line with other currencies worldwide," said Thiti Tantikulanan, head of capital markets at Kasikornbank Pcl in Bangkok.

The baht has risen 11 percent this year, the second-strongest currency in Asia after the yen, pushed up in part by foreign inflows into Thai assets.

With interest rates in the developed world at record lows, emerging market governments are scrambling to respond to a surge of demand by global investors seeking higher returns.

The tide of money is rising as markets anticipate that the Federal Reserve will crank up the money printing presses again next month to try to galvanise the stuttering U.S. economy.

A second round of quantitative easing by the U.S. central would aim primarily to lower long-term U.S. interest rates, but it would also pile more pressure on dollar, which is already languishing near a 15-year low against the yen.