That concern was part of what prompted the securities crackdown. If Malaysia can show foreigners that it will not countenance illegal stock deals and cronyism, perhaps overseas investors can be enticed to forget about the year during which they were prevented from moving their money. It's a reasonable strategy - except that the new attention to securities laws carries the whiff of a political agenda. Two of three violators nabbed so far have links to Anwar Ibrahim, the former deputy prime minister who has been sacked, convicted of obstructing justice, and is currently on trial facing charges of sodomy. Several other top bankers and corporate leaders - again, some with Anwar connections - may be charged with securities violations in coming weeks. Meanwhile, no one close to the prime minister or Finance Minister Daim Zainuddin has been touched.

 It is not the sort of move likely to inspire confidence in foreigners. And neither are some pretty nasty anti-foreigner statements that have been made by the prime minister over the past several months. For instance, earlier this year he said: "History shows that whites always tend to oppress and dominate non-whites as they feel these groups are stupid. They still want to dominate us and are uneasy over our independence." Analysts worry that foreigners will repatriate as much as $5 billion after the controls are lifted (total capitalization of the Kuala Lumpur Stock Exchange, or KLSE, is close to $140 billion). Currently, foreign portfolios - not including foreign stakes in listed subsidiaries or strategic investments by foreigners in listed companies - are worth about $13 billion. More than $5 billion of that is in CLOB shares, Singapore-traded securities of Malaysian companies. The CLOB money remains frozen after the Sept. 1 deadline until a separate deal is worked out. That leaves $8 billion, which has already shown an itchiness for the door. The KLSE has fallen about 20% in the last six weeks. The decline can be blamed in part on a regionwide stock slump, though the Sept. 1 end to restrictions is clearly a factor.

 The government has tried to counter the expected outflow by making it easier for Malaysians to borrow from banks so they can invest in stocks. So far this year, bank credit has grown by less than 2%, well short of the 8% target set by Mahathir. Yeoh Keat Seng, head of research for Merrill Lynch in Malaysia, doesn't think the end of controls will have much impact: "There has been some selling and there will be some more. But Sept. 1 is just another date." 

Yeoh points out that even if the entire $13 billion were to leave the country - unlikely given the continuing CLOB restrictions - Malaysia would still have over $18 billion in reserves, not much less than when the controls were imposed. Others think there could be some damage to Malaysia's international reputation. "If there is a substantial outflow, it will cause a dent in international investor confidence," says Mohammad Ariff, the executive director of the Malaysian Institute of Economic Research. 

But how much worse, really, could international investor sentiment get? From the time the controls were announced nearly a year ago, foreigners have excoriated Kuala Lumpur for trying to build a magical wall around Malaysia that lets exports out, permits long-term capital in - but blocks almost any movement of portfolio investment. As Malaysia has recovered over the past year, the critics have been silenced. Even after recent setbacks, the KLSE is still 160% above where it was before the controls, which makes it one of Asia's better performers. Industrial output in the first half of this year was up nearly 2%. Gross Domestic Product is now expected to be 3% this year - Merrill Lynch thinks it will be 4.9% - which compares with consensus forecasts when the year began of slightly negative GDP. Foreign reserves are way up and exports are recovering. 

"A year after capital controls, we Malaysians can proudly say: We told you so," says Ramon Navaratnam, a retired top civil servant from Malaysia's finance ministry. "We always knew the International Monetary Fund couldn't teach us a thing. Indeed, we have taught them a few lessons." But how successful have the controls actually been? 

In hindsight, many argue that they came at precisely the wrong time - when Asia was poised to begin its recovery. Consequently, Malaysia locked out the world just as global money was set to come knocking. Ostensibly, the controls were meant to keep foreign currency speculators from passing judgment on Kuala Lumpur's recession-fighting moves. But last September's debt default by Russia and the collapse of Long-Term Credit Management in the U.S. effectively neutralized the currency speculators in a way no controls ever could. So, while Malaysia can boast that it has experienced a net inflow of $1.1 billion in foreign capital despite the controls, Thailand has claimed as much as $10 billion in additional portfolio capital and South Korea up to $17 billion. Even Indonesia, until recently seen as an economic basket case, attracted $1.2 billion. 

Malaysia appears to have spent more in relative terms than its neighbors to boost its economy. It has been able to cut interest rates faster and further than Thailand and South Korea, for example. Just last week, Bank Negara Malaysia, the central bank, lowered the rate at which it lends to banks for the ninth time since controls were implemented, from 6% to 5.5%. 

One of the biggest concerns at the time controls were announced was whether corporate restructuring, which foreign observers and analysts thought was necessary but was mostly rejected by Mahathir, would go forward. Some critics charged that the restrictions would merely allow Malaysia to continue its crony capitalism. Says Navaratnam: "What the foreigners wanted was blood in the streets - failed companies, redundancies, leaner and meaner Malaysian companies." But he says the government rejected this approach as cruel. "Slash-and-burn restructuring brings social unrest and a little bit of efficiency," he says. "Malaysia may not have the most efficient companies in the world, but at least we have a human face to our economic policy."

 Few foreign managers of Malaysian mutual funds, however, are clamoring for large-scale layoffs. Emerging markets guru Mark Mobius of Templeton Asset Management was once Malaysia's biggest fan. Not now. "There are [not many] rules there," he says. "And the rules they have, they keep changing. You have one rule for crony companies and another rule for the rest. Professional fund managers don't like that Mickey Mouse business." Templeton has been a net seller of stocks the last few weeks. Hugh Young, a fund manager for Aberdeen Asset Management who has had tens of millions of dollars worth of equities frozen because of the controls, says he is now tempted to reduce holdings and take profits. "We have done well this far. And while there are still some attractive companies [in Malaysia], there are risks." 

"So far, corporate restructuring in Malaysia has lagged the rest of the region," says Young. Kuala Lumpur unveiled a bold plan to rationalize its banking industry two weeks ago, but the details have been controversial. In particular, the Chinese community has complained it will be largely shut out of the process whereby 22 institutions are consolidated into six. Specifically, the ethnic-Chinese bankers say their smaller but profitable niche banks will be absorbed by big money-losers - with better political connections. The same issue may heat up again if Kuala Lumpur goes ahead with plans to consolidate 64 stock brokerages. Overlaid atop the consolidation, arrests and stock movements are political considerations. Elections may be called in the next few months, but the prime minister obviously would like his party's chances better if stocks were booming. It seems the end of controls governing the repatriation of foreign investment will not close the debate about the influence of politics on business decisions.

 - With reporting by Arjuna Ranawana / Kuala Lumpur
 
 

PRICES REPORTED IN ASIAWEEK ARE IN U.S. DOLLARS UNLESS OTHERWISE SPECIFIED.
 
 

The Asian recovery has helped Asian stock markets across the board in the last 12 months