ECONOMICS: Capital Controls: How India and China do it
Far Eastern Economic Review
Sept 17, 1998
Out of Controls
By Salil Tripathi in Singapore and Trish Saywell in Shanghai
Much of Asia is in recession with the notable exception of its
behemoths, China and India. Jardine Fleming predicts China's GDP will
grow 6.5% this year, India's, 5.3%. True, the rupee has fallen 16% this
year, propelled by India's nuclear tests in May, but the renminbi is
holding steady. Have Beijing's mandarins and New Delhi's babus, who
administer their countries' capital controls, got it right?
Malaysians cheering Prime Minister Mahathir Mohamad for imposing
capital controls think so. The stockmarket is off its recent record
lows, while foreign manufacturers in Malaysia such as Unilever and Dell
approve, saying controls reduce price volatility.
But it may not be so easy for Malaysia to reap the benefits
controls: It isn't such a big market, and it is more engaged with the
global economy. What's more it will almost certainly acquire the
problems controls create for China and India -- bureaucratization and
leakages, leading to corruption and capital flight.
Malaysia depends more on foreign trade than China or India.
foreign trade is 1.6 times its GDP; China's is only about a third and
India's is less than a fifth. Malaysia's new controls will likely
disrupt trade, though, since they require too many procedures that
trigger frustration and delays. A Singapore-based trader says Malaysia
will be like India in the old days: The authorities will closely
scrutinize imports and exports, and even intra-company transactions will
India and China can better afford such disruptions because they
huge, growing markets. Rajeev Malik, Asean economist at Jardine Fleming,
says this offers domestic companies the opportunity to grow at home when
foreign trade is cumbersome. Malaysia, with its population of just 22
million, doesn't have a vast domestic market to fall back on. Worse,
Jardine Fleming expects Malaysia's economy to contract by 6% this year.
Controls throw up barriers for domestic companies hoping to
abroad, also. Yang Siqun, a researcher at the Chinese Academy of Social
Sciences in Beijing, notes that Chinese companies need many approvals to
invest overseas, pay dividends abroad or even import products.
Similarly, Malaysia now stipulates central-bank approval for any outside
investment of 10,000 ringgit ($2,630) or more.
Controls usher in other problems. Chinese traders can forge
documents to park earnings abroad. Indians, living under similar
controls, under-report exports or exaggerate imports to keep earnings
abroad. This breeds corruption and curbing it requires expensive
solutions. China is developing a computerized system at major customs
houses to prevent fraud, says Yang.
Malaysia, meanwhile, will have to act fast to regain its growth
momentum. Tan Shern Liang, a portfolio manager at Citibank's private
bank in Singapore, says Malaysia could see huge amounts of money rush
out of the door on September 1 next year, when foreigners who now have
ringgit in Malaysia will be allowed to sell their holdings. "Mahathir
has a year to make it up to foreign investors," says Tan. The clock is