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Taiwan’s central bank has warned “a few foreign investors” against violating its capital controls as it seeks to contain volatility in its rapidly appreciating currency.
In a statement to the Financial Times, the Central Bank of the Republic of China said it had “strengthened communication with a few foreign investors” and “asked them to self regulate and make necessary improvements” after finding that foreign capital inflows were not being invested in domestic securities. It did not name the investors.
The warning comes as the central bank seeks to rein in the New Taiwan dollar’s sharp rally without being labelled as a currency manipulator by the US. The Taiwan dollar has strengthened more than 10 per cent this year, threatening an economic model built around the country’s enormous trade surplus.
Taiwan is currently on the US Treasury’s monitoring list for currency manipulation. Large interventions to contain the Taiwan dollar’s appreciation would risk it being classified as a full-blown manipulator, said Lemon Zhang, a foreign exchange and emerging markets macro strategist at Barclays.
In order to reduce appreciation pressures without intervening, the central bank is stepping up efforts to “close loopholes and discourage speculative shorts”, said Zhang.
Taiwan requires foreign investors who convert money into Taiwan dollars to use the cash for investment. Violating the regulations can hamper investors’ ability to work in the country, giving the central bank an indirect channel to influence exchange rates, said analysts, although the bank’s foreign exchange regulations say “there are effectively no foreign exchange restrictions in Taiwan”.
“Not many people want to go against the [central bank] openly,” said Kiyong Seong, lead Asia macro strategist at Société Générale.
“You can’t effectively operate in Taiwan if you don’t have a healthy relationship with the central bank,” added Brad Setser, a senior fellow at the Council on Foreign Relations and former US Treasury official.
Taiwan’s currency began experiencing volatility in early May, when it appreciated more than 9 per cent against the US dollar over three trading days.
The rally was driven largely by the country’s exporters repatriating assets and by life insurers with large US holdings rushing to hedge their exposure to a weakening US currency.
Taiwan’s export-dependent economy has vast US dollar holdings. Exports last year reached a record $475bn and comprised about 60 per cent of GDP, double the global average, according to the World Bank. A sharply appreciating home currency threatens to erode the value of those assets and make Taiwan’s products less competitive globally in the long term.
The central bank has sought to calm markets by discouraging currency speculation. It warned importers and exporters last month against speculating on exchange rates and spoke out against investors using a combination of exchange traded funds and inverse ETFs to take positions on the Taiwan dollar.
In May, it launched investigations into the local banking sector to discourage speculation. The central bank has also said it would consider imposing trading delays on foreign investors deemed to be speculating on the currency.
But it is fighting against what market observers describe as Asian currencies’ structural appreciation against the US dollar.
“Taiwan dollar appreciation is not purely coming from speculation,” said Seong. Analysts have noted that the transactions of life insurers and exporters, along with speculative financial flows, are all working to strengthen the currency.
“People pile on, there’s pressure,” said Setser. “Once things start to move, they continue to move. There needs to be a new equilibrium.”
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