Taiwan Bans Capital Inflows in Time Deposits to Curb Currency AppreciationOn November 10, 2009, Taiwan's Financial Supervisory Commission barred foreign investors from parking their money in time deposits after bringing funds into the country. Plus, foreign investors will not be allowed to extend the deposit maturity beyond three months.
Until now, foreign investors were allowed to deposit 30% of the inflows in time deposits for three months with a possible extension for another three months. Portfolio investors can still invest 30% of the net inflows in government bonds, money market instruments, money market funds and derivatives. (via Reuters and Citigroup; 11/10/09)
As of October 2009, foreign investors had parked US$15.5 billion in Taiwan dollar accounts, almost five times the level considered appropriate by the central bank. The central bank has voiced concerns that beside investing in Taiwanese stocks, foreign investors were putting money into Taiwan Dollar deposits to earn interest plus currency arbitrage given the appreciating Taiwan dollar.
The move follows large capital inflows into Taiwan's dollar accounts recently which is putting upward pressure on the Taiwan Dollar and hurting export competitiveness. The central bank has been intervening in the FX market and had recently hinted at capital controls to contain currency strength. (via Reuters and Citigroup; 11/10/09)
As of October 2009, foreign investors had parked US$15.5 billion in Taiwan dollar accounts, almost five times the level considered appropriate by the central bank. The central bank has voiced concerns that beside investing in Taiwanese stocks, foreign investors were putting money into Taiwan Dollar deposits to earn interest plus currency arbitrage given the appreciating Taiwan dollar.
The move follows large capital inflows into Taiwan's dollar accounts recently which is putting upward pressure on the Taiwan Dollar and hurting export competitiveness. The central bank has been intervening in the FX market and had recently hinted at capital controls to contain currency strength. (via Reuters and Citigroup; 11/10/09)
Analyst Cheng-Mount Cheng, Citi: Taiwan's measure is a "warning" for foreign investors than a de facto capital control. With continued speculative inflows and U.S. dollar weakness, further capital controls cannot be ruled out. (11/10/09)
Analyst Ma Tieying, DBS: "Some investors may interpret that as a positive signal for the stock market because if the inflows can't be parked in time deposits, some may be transferred into the stock market." (via Bloomberg; 11/11/09)
Brown Brothers Harriman & Co.: The fact that the Taiwan dollar has not appreciated much in 2009 "makes the ban on foreign investment in time deposits to curb currency speculation a bit of an exaggerated response. On the other hand, the fact that reserves have increased by almost 23% this year suggests that the muted currency rise may also be reflective of the success of intervention." (via Bloomberg; 11/11/09)
Taiwan dollar (TWD) appreciated to 32.3/USD as of October 13, 2009, gaining 1.61% on a YTD basis. TWD has been on an appreciation path since early March 2009 on the back of surging capital inflows and widening trade surpluses.
Capital inflows: Foreign portfolio investment in equities surged to more than US$13 billion on a YTD basis as of October 15, 2009 (Bloomberg), in stark contrast to an outflow of nearly US$17 billion recorded in 2008.
Taiwan's FX reserves rose by US$8.98 m/m to a record high US$341.22 billion as of end-October 2009. (Ministry of Finance; 11/05/09)
Outlook: TWD will continue to face appreciationary pressure if capital inflows and trade surplus maintain their momentum. Improving economic ties with China will strengthen the TWD in the longer-term. However, in the near-term, the central bank's bias for a weaker currency to support exports and the economy might deter investors' appetite. Any sign that the global recovery is less than robust will put downward pressure on the TWD.
Analyst Johanna Chau, Citi: The risk of capital flow restriction exists in Taiwan as strengthening TWD will weaken exports. But that risk is not high, considering "sterilization costs don't look as pressing, President Ma's open door policies and CBC likely to lag the region in rate hikes." (10/21/09)
Analyst Cheng-Mount Cheng, Citi: TWD will continue to appreciate as long as "global economy and investor's risk appetites" maintain their momentum. However, capital inflows might pose a risk if it is not sustained. (09/25/09)
Analyst Philip Wee, DBS: High unemployment rate will lead the government to build more FX reserves than to allow the currency to strengthen further. (09/17/09)
Director Tamara Henderson, ANZ: TWD will benefit from strengthening economic ties with China. But downside risk remains due to central bank's bias to support exporters. (09/01/09)
Analyst Ivan Tachakarov, Nomura: Like other regional currencies, TWD is undervalued compared with its fundamental. Taiwan has current account surplus of 7.7% of GDP as of March 2009. (08/07/09)
During Taiwan’s export recession in 1998, USD/TWD peaked in the sixth month of contraction and in the fifth month of the global tech recession of 2001. In this global credit crisis, Taiwan’s export numbers first turned negative in November 2008, putting February 2009 as the fourth month of contraction. (DBS; 03/12/09)
source RGE Monitor
