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S. Korea Government Studying ‘Several’ Measures to Control Capital Flows
Source: bloomberg.com
Source Date: Thursday, October 21, 2010
Country: Korea (Republic of)
Created: Oct 25, 2010

South Korea’s government is discussing several measures to control capital flows, Vice Finance Minister Yim Jong Yong said. “We studied several possible measures such as a Tobin tax, bank tax, leverage controls and then chose the derivatives limits in June,” Yim told reporters in Gwacheon today. “We’re now discussing all of these measures, but nothing has been decided yet.” A Tobin tax is applied to financial transactions. Nations from Brazil to China are striving to restrain their currencies by selling them or applying capital controls as investors seek higher-yielding emerging market assets amid near- zero U.S. borrowing costs. Capital flooding into Asia may lead to excessive exchange-rate moves, asset bubbles and financial instability, International Monetary Fund head Dominique Strauss- Kahn said Oct. 18. “We have to be very careful in approaching this issue as it can have a huge impact,” Yim said. “We also need to consider how the market will react.” Levying taxes can be “too rigid” as it needs parliamentary approval and give the impression that South Korea is trying to control the currency market, he said. The won closed 0.2 percent down at 1,129.60 per dollar in Seoul today, according to data compiled by Bloomberg, and has risen by 6.6 percent in the past three months.

That’s the third- biggest gain in non-Japan Asia, an advance that may threaten export competitiveness. South Korea began an audit of banks handling foreign- currency derivatives on Oct. 19 to clamp down on speculation. Morgan Stanley and DBS Group Holdings Ltd. were among those scrutinized. Finance chiefs of emerging economies have blamed monetary easing by advanced nations for pushing investment into their markets and stoking currency appreciation. The U.S. and Europe have been pressuring emerging countries to let their exchange rates appreciate to rebalance demand in the world economy. Further measures to counter capital inflows triggered by “low” interest rates overseas are being prepared, Finance Minister Yoon Jeung Hyun said at a parliamentary audit in Seoul two days ago. The authorities will act when “herd behavior” causes sudden moves in the currency, Yoon said. Brazil this week stepped up efforts to curb gains in the real by announcing an increase in inflow taxes. Taiwan’s central bank said in a statement released two days ago that it will step into the currency market when the local dollar “overshoots.” Thailand said last week it will remove a 15 percent tax exemption for foreigners on income from domestic bonds.

Currencies and trade flows may dominate the Oct. 22-23 meeting of Group of 20 finance ministers in Gyeongju, South Korea, and the summit of G-20 leaders in Seoul next month. Treasury Secretary Timothy F. Geithner will meet his counterparts in Gyeongju as tensions heat up over China’s yuan. Geithner last week delayed a report on foreign-exchange markets, saying the yuan remained undervalued and that China needed to show continued commitment to allowing the currency to rise against the dollar over time. “In my personal opinion, I think we will reach an agreement” over currency disputes, Yim said. “China is showing an effort -- they raised interest rates. It won’t do them both any good if they fight because that may lead to trade protectionism.” China increased interest rates on Oct. 19 for the first time since 2007. The G-20 finance chiefs are planning to promise to refrain from “competitive undervaluation” of their currencies, according to a G-20 official citing the current draft of a statement, which may still be revised before it’s issued on Oct. 23.
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