As policy flip-flops go, it was pretty spectacular. Late yesterday evening Thailand's finance minister announced that foreign investors would be allowed to invest freely on the Bangkok stock exchange, reversing capital controls imposed just one day earlier by the central bank. The reasons for the abrupt about-turn were all too obvious. The initial announcement late Monday of new rules intended to deter short-term inflows of speculative capital triggered a gut-wrenching 15 per cent sell-off in the Thai stock market. It was not only Thai stocks that were hit. Fears soon spread that other countries in the region could follow Thailand's example and impose capital controls of their own. As market players quickly reassessed the risk of holding Asian assets, investors began heading for the exits. Indonesian stocks dropped 3 per cent while benchmark indices in Malaysia and Singapore each fell 2 per cent. The regional sell-off also prompted profit taking in Hong Kong where the Hang Seng Index slipped 1.19 per cent despite the territory's commitment to a fully open capital account. Now, following last night's U-turn, investors are likely to conclude that Asian stocks represent great value after yesterday's sell-off and to buy back in when markets open today. Even so, it is not only Thailand's authorities who should learn their lesson. The Bank of Thailand may have been taught a thing or two about the dangers of interfering with the free flow of capital. But international investors have also been dealt a sharp reminder of how easily unexpected events can trigger a reversal in bullish sentiment towards Asia's stock markets. The original controls were triggered by the strengthening of the baht. On Monday, the currency hit a fresh post-crisis high against the US dollar after rising 17 per cent this year. The baht's appreciation has provoked squeals of protest from Thai exporters who complain that the currency's strength is eroding their competitiveness in international markets. The standard response would have been for the central bank to cut interest rates to make investment in baht assets less attractive. But with consumer price inflation in Thailand already running at an uncomfortable 3.5 per cent and threatening to tick higher when price controls are relaxed early next year, it appears that option was quickly dismissed. Instead the authorities decided to prevent further baht strengthening by targeting foreign portfolio investors who have pumped an estimated US$4.5 billion into Thailand's asset markets this year. Under the rules imposed on Monday, foreign investors would have had to pay an effective 10 per cent tax rate on short-term investments. In response, the baht dropped by almost 3 per cent from Monday's high with the US dollar rising to 36 baht early yesterday before retreating slightly. The fear spread rapidly that other Asian countries would introduce similar measures to avert currency appreciation. Even before Monday, market-watchers were predicting the Bank of Korea would take steps to reverse the rise of the won which has hammered exporters by strengthening almost 10 per cent this year. The Philippine central bank has also been contemplating new rules after the peso had risen 9 per cent over the past six months. Investors took fright that Malaysia, Indonesia and Singapore could also act to prevent unwanted currency appreciation. Now, after yesterday's sell-off, Asian authorities are sure to be wary of announcing any new measures to rein in strengthening currencies. But the depth and extent of yesterday's sell-off should serve as a reminder to investors just how little risk they are pricing into the region's stock markets and just how rapidly a re-rating can occur in the event of a nasty surprise.