Currency policy in Taiwan is facing ‘turning point’

Bloomberg

Foreign demand for a slice of Taiwan’s increasingly profitable companies is threatening to upend the central bank’s decades-old currency management policy.
Central bank board member Chang Chien-yi told Bloomberg in a rare interview that the institution won’t be able to fight currency appreciation if the Taiwan dollar rises on economic fundamentals as the competitiveness of local industries improves.
“The next two years will be an important turning point,” Chang said. “The central bank will have to respect the markets. It won’t be able to forcefully slow the currency’s appreciation.”
The Taiwan central bank’s currency management has come under increased scrutiny, with the US Treasury saying in April that it wants to engage Taipei over the “structural undervaluation.” Investors have piled into the island’s tech-driven markets, as the economy outperforms peers that are still gripped by the pandemic, making the Taiwan dollar the best performer in Asia this year.
The US-China trade war has sparked a major reshuffling of supply chains and given opportunities to a wide range of Taiwanese exporters, according to Chang. It will also allow Taiwan’s central bank to rethink its currency policy, as exporters may be able to thrive without foreign-exchange support, he said.
The Taiwan dollar rose to its highest level since July 1997 in April. Strategists are predicting that it will charge higher in the coming months, while the options market is also showing waning demand to hedge the currency against strength in the greenback. One-month risk reversals are holding close to the lowest level since March.
“The comments suggest that the central bank will be willing to tolerate more currency strength, though they are wary of the impact that could have on firm profitability if it moves too much,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. in Singapore.
Around 97% of companies in Taiwan are small and medium-sized enterprises and many of them are exporters, Chang said by phone. These companies have traditionally been very vulnerable to fluctuations in exchange rates, according to Chang, who also serves as the president of the Taiwan Institute of Economic Research.
“If the Taiwan dollar strengthened, not only might these companies have worked for nothing, they could also be at risk of going bankrupt, which could have caused all kinds of societal problems,” he added. “SMEs didn’t have the means for currency hedging and they didn’t have a lot of cash on hand.”
Chang’s remarks are the latest signs of a new openness and tolerance for public debate at Taiwan’s typically taciturn central bank. Last month, two current and one former member of the policy board co-authored a book discussing how much damage the bank’s efforts to maintain a weak currency had done to the economy over the past 20 years.
Chang, who joined the policy board in January last year, applauded the bank for improving transparency under current Governor Yang Chin-long. But, he pointed out that there are other areas the bank still needs to improve on.
Almost all of the time at quarterly board meetings is taken up by reports from each of the bank’s departments, leaving little time to fully discuss policies, according to the recently published book — a view that Chang agrees with.
Most importantly, he said, the central bank should clearly define its monetary-policy goals, which would allow board members to discuss it in greater depth.