HO CHI MINH CITY, Vietnam, June 6 (Reuters) - Capital controls could be an option for taming volatile capital flows in Asia, but should be only deployed in exceptional circumstances and after other tools are tried first, a senior International Monetary Fund official said on Sunday.
Over the past several months the region saw a wave of capital flow in, then ebb in more recent weeks, and Naoyuki Shinohara, deputy managing director of the IMF, said that volatility posed a challenge to policymakers.
"In exceptional circumstances capital controls can be approved, but there are lots of things that they have to do before that," he told Reuters on the sidelines of the World Economic Forum on East Asia.
He listed macroeconomic adjustments, "prevention measures" and more flexible exchange rates as some of the other options, naming China as one of the currencies the IMF had in mind. He declined to name other currencies.
IMF Managing Director Dominique Strauss-Kahn said in Busan, South Korea, on Saturday China’s yuan was still substantially undervalued.
"If the capital flows are very volatile, and temporary, then capital controls might be an option but I guess it needs to be carried out in exceptional circumstances because it has an impact in terms of market perceptions, and the practicality and implementation difficulty is one of the areas that they have to take into account," Shinohara said.
Another worry for the region was the possibility of a drop in export demand from abroad, namely Europe, where economic prospects have been clouded by sovereign debt worries of Greece and others and the euro has taken a beating.
In Asia, he said, domestic demand was strengthening but "still, it largely depends on external demand for growth, so there is a risk that the global demand will decline, especially in Europe, and that would have an impact on exports from Asia.
"I do not see very much risk in banking sector spillover," he added.
