Taiwan should consider a package of capital controls if it wants to curb currency swings driven by speculative fund inflows, the island’s chief economic planner Christina Liu said.
“We should actually discuss and talk about a capital control package if we really want to have capital controls,” Liu said yesterday in an interview in Taipei. “If no countries impose them, that will be best. But if some economies start to impose capital controls, then those who don’t will suffer the most. So we have to figure out some kind of capital control, too.”
Officials from Asia to Latin America have sought to curtail inflows drawn by higher growth rates to limit currency gains threatening exports. Taiwan last month restricted foreign investment in government debt, and the central bank aims to halve speculative money in the island’s financial markets.
“We don’t want to be the target for speculators, forced to appreciate more than the fundamentals,” said Liu, head of the Council for Economic Planning and Development and a former presidential adviser. The central bank so far “doesn’t discuss” the issue of capital controls with other ministries, “so I don’t know what’s in their mind,” she said.
The Taiwan dollar has risen 5.5 percent over the past three months against its U.S. counterpart, the most in Asia, according to data compiled by Bloomberg. It traded at NT$29.830 as of 2:01 p.m. local time.
Export Sales
Further increases risk crimping export competitiveness at firms such as Taiwan Semiconductor Manufacturing Co., the world’s largest custom manufacturer of chips, in an economy where exports are equivalent to two-thirds of gross domestic product.
The U.S. Federal Reserve’s plan to inject $600 billion into the world’s largest economy is spurring investment into Asia, Liu said. “A lot of it is speculative funds,” she said.
The island in November said it will restrict offshore funds to investing no more than 30 percent of their portfolios into domestic government bonds and money-market products.
Governor Perng Fai-nan said Nov. 29 that the central bank wants to halve so-called hot money flows to Taiwan to NT$150 billion ($5.03 billion). He also said no decision had yet been made on whether to levy a fee on deposits by foreigners at banks on the island.
The central bank has bought the U.S. dollar in late trading almost every day for the past eight months to shield exporters, traders said this month. They declined to be identified as the monetary authority doesn’t publicly disclose such details.
Currency Stability
Taiwanese exporters seeking exchange-rate stability should hedge currency risk, as the fact that some companies might struggle doesn’t mean the government should restrain the local dollar over the long term, Liu said. They should also target Asian consumers, not just European and U.S. ones, she said.
Asian economies from Thailand to South Korea have taken steps this year to curb currency gains. Thailand is ending a 15 percent tax exemption on income from domestic bonds held by overseas buyers.
South Korea has tightened oversight of foreign-currency derivatives and backed the revival of taxes on overseas investors in treasury and central bank bonds. It also aims to apply a levy on foreign-exchange borrowings by banks to guard against sudden capital outflows.
Aligned in Asia
It’s “extremely important” that Taiwan is “in line with other Asian economies and other Asian currencies,” said Liu, who was economic adviser to President Ma Ying-jeou from 2008 to 2010.
Taiwan dollar appreciation can be seen as a “healthy development” as long as it reflects the economy’s performance and is comparable with other Asian currencies, she said.
Recent reports signaled Taiwan’s economy is weathering the increase in its currency. Industrial production rose for the 15th straight month in November, while the unemployment rate fell to a two-year low.
The island’s GDP is set to grow 9.32 percent this year, one of the world’s fastest rates, according to International Monetary Fund data. Domestic demand and closer economic links with China have been contributing to the expansion, Liu said.
All 11 economists in Bloomberg News survey expect the central bank to raise the benchmark interest rate by 0.125 percentage point to 1.625 percent at its next quarterly interest-rate policy meeting on Dec. 30, following two increases of the same amount in each of June and September.
Source: BLOOMBERG
http://www.bloomberg.com
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