Taiwan, Philippine moves latest in Asia's hot money war

Last Updated: Tue, Nov 09, 2010 15:50 hrs

/TAIPEI (Reuters) - Taiwan on Tuesday slapped a cap on bond investments by foreigners while traders in Philippines said the central bank had exacerbated a local dollar shortage, highlighting Asian policymakers' worries about foreign capital inflows.

A new round of quantitative easing in the United States has raised fears of a pickup in hot money flows into emerging markets. Governments in Asia and Latin America, alarmed about currency appreciation, have vowed more steps against the foreign capital flooding their countries.

Taiwan's Financial Supervisory Commission said foreign investors would be banned from investing more than 30 percent of their funds in Taiwan in local government bonds, reintroducing a curb that had been scrapped in 1995.

The moves comes after the country bought back T$2 billion ($66 million) of five-year government bonds last week, well below its target of T$40 billion in a sign of continued strong demand for government paper.

While the government said the buyback was aimed at improving debt management, market players saw it as motivated by the need to cut flows of "hot money" into government bonds.

The Taiwan dollar has risen to its strongest in more than 2-1/2 years against the dollar, raising concerns about the competitiveness of its exporters. It is up more than 6 percent against the dollar this year.


In the Philippines, a move by the central bank to absorb dollars knocked the peso off 2-1/2 year highs of 42.50 per dollar down to around 43.40 on Tuesday. Traders raced to cover short dollar positions and pushed short-dated swap rate to record lows.

Some traders said the bank was trying to squeeze the market as an alternative tactic as its daily dollar-buying interventions have done little to stem the peso which is up almost 7 percent this year.

Philippine Finance Secretary Cesar Purisima said the government would not stand in the way of the peso's appreciation but was focused on smoothing sharp moves in the currency.

"We do not believe we can fight this trend because this is a global trend...Our goal is not to fight the trend," Purisima told reporters. "Our goal is, first, to smoothen the trend so that it is not very volatile."

The government is keen to attract foreign funds to help finance infrastructure projects but authorities are also wary of the money only being placed in short-term assets. Purisima said the funds could be channelled to more productive purposes."

"What we can do is change the mix of our borrowing, maybe borrow more locally and help us attain our goal of reducing foreign currency borrowing," he said, adding the government may make early repayments of debt to create more demand for dollars and stem the peso's rise.

(Additional reporting by Rachel Lee in Taipei; Editing by John Mair and Sujata Rao)

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