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Currency War Update: Malaysian Capital Controls back in South Korea

December 20, 2010

Back during the Asian Crisis of 1997, Malaysia instituted capital controls.  In real time, these were widely disparaged – mocked mercilessly and portrayed as evil.

But they worked.  The Malaysian economy wasn’t smashed as hard as other places, and when the crisis subsided, investors returned in force just a few years later.

South Korea noticed – they were one of the hardest hit economies during the 1997 crisis.  And keeping their economy open did not help them, it seemed to actively hurt them.

Now, there is a slightly different dynamic – too much money is coming into these red hot Asian markets.   This is similar to what happened in the go-go years prior to 1997.   Because much of the money then and today is used to finance short term speculation in the currency and debt markets to finance the carry trade, the taxes imposed target these instruments directly.  SK is taxing non-deposit short-term liabilities from domestic banks.

South Korea is taking a pre-emptive measure to avoid a massive runup in the KRW. It is deliberately forgoing some of the capital flows to make sure that too much money doesn’t flow into their economy.    This should help keep a the KRW weaker in price.

Back when Malaysia announced you couldn’t take money out of the country, it was viewed as a crime against capitalism.  This move by one of the major Asian players is extremely similar, but probably won’t face the same disdain from the international community.

But it is impossible to view this outside of the lens of the Currency War that is happening right now.  Brazil, Korea, and a host of other emerging market countries are doing their best to make it difficult to speculate in their country short term while keeping the long-term investment community happy.   Short term speculation drives up currency prices, which makes exporting less profitable in home currency terms.

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