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 percent 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 galvanize 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.
Japanese Finance Minister Yoshihiko Noda said he had explained to a weekend meeting of the Group of Seven industrial countries in Washington that Tokyo had intervened on Sept. 15 to prevent destabilizing lurches in exchange rates.
"The G7 reaffirmed that excessive currency moves would hurt stability in the economy and in the financial system ... From this standpoint we will take decisive steps, including intervention, when needed, while watching currency market moves with great interest," Noda told a news conference.
With governments digging in their heels against currency appreciation, fears are mounting of a "race to the bottom" that may trigger protectionist trade tariffs that would hobble global growth.
A leading Chinese newspaper acknowledged the risk of conflict.
"The financial crisis could escalate into a currency crisis," the China Securities Journal said in a front-page editorial. "There will be no winner."
The U.S. House of Representatives has already passed a bill that would authorize retaliation against China for holding down the value of the yuan. And U.S. Treasury Secretary Timothy Geithner is due to determine by Oct. 15 whether China is "manipulating" its currency to gain an unfair trade advantage.
Mark Williams, an economist with Capital Economics in London, said he expected the semi-annual report to be delayed until after next month's mid-term U.S. elections and that Beijing would again escape a charge of manipulation.
"In a sense though, the twice-yearly dance between the Treasury and China is already becoming a side show. Whatever the Treasury decides, Congress seems determined to take a hard line," Williams said.
REFORM DOES NOT EQUAL APPRECIATION
Political pressure on China is likely to mount ahead of a summit in Seoul on Nov. 11-12 of the Group of 20 major economies.
G20 finance ministers gather in South Korea on Oct. 22-23 to prepare the talks after a largely fruitless flurry of exchanges at the weekend during the International Monetary Fund's annual meeting.
The China Securities Journal agreed that efforts by the United States and Japan to weaken their currencies would generate considerable pressure for a rise in the yuan.
Money flows into emerging markets risked pushing up inflation as well as stock and property prices, it added.
But, far from advocating faster appreciation to help dampen price pressures, the paper said Beijing would have to control the yuan's rate of climb and refrain from raising interest rates in order to ward off inflows of speculative capital.
Sure enough, the People's Bank of China applied the brakes on Tuesday to the yuan's gradual ascent by setting a weaker midpoint reference rate for the day's trading in Shanghai.
The yuan has risen just 2 percent against the dollar since Beijing scrapped a peg to the U.S. currency on June 19.
"Currency reform does not equate to yuan appreciation. The emphasis is more on the improvement of the currency formation mechanism," the State Administration of Foreign Exchange, an arm of the central bank, said in a report.
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