View from City Road: Malaysian ifs behind the tiffs

Dr Mahathir Mohamad, Malaysia's PM, is having another emotional tiff at the moment, not with the British but with the foreign exchanges. This time, letters to the Financial Times are unlikely to have much impact.

With wage rates one fifth the level in rich Singapore to the south, Malaysia is an attractive place to invest. And exports from its new factories are also boosted by a highly competitive exchange rate.

This is at least 30-40 per cent below what it should be, according to Wong Yit Fan, chief South-east Asian economist of Standard Chartered.

Take that advantage away, and Malaysia would not be feeling nearly so confident about its trade prospects, and perhaps not quite as belligerent towards Britain.

Bank Negara - the Malaysian Central Bank - has spent three months fighting to slow an influx of foreign funds that is driving the currency upwards. Interest rates for foreigners have turned negative. Reserve requirements for banks have been tightened and barriers have been erected to capital movements, including limits on non-resident holdings.

This has not worked, and more measures are rumoured, including perhaps direct controls on the inflow of funds. Not quite the same as the last days of the ERM, but attitudes seem similarly obstinate and while Dr Mahathir worries about keeping exports competitive economists fear he may lose his grip on monetary policy altogether later this year. There are shades of Lord Lawson here.

This is a serious concern that from the Asian perspective makes the row with Britain look like a sideshow or even a deliberate distraction. Malaysia is being watched carefully by its neighbours to see if it can get its act together. Rising inflation could easily undermine the attractions of investment in Malaysia, whether direct or through the stock market, which already looks subdued.

The Malaysian ringgit is not a liquid international currency so perhaps Dr Mahathir's stubbornness will produce results for a while.

But with deregulation spreading like wildfire in the area as countries compete for investment, keeping the currency so far out of line with reality is not a game even Dr Mahathir is likely to win.