Wednesday, November 10, 2010

Taiwan dollar headed up

In the bad old days of martial law, you had to go to jewelry stores to change money on the black market if you wanted greenbacks. At that time the NT dollar was fixed at 40 to the US dollar, and to get foreign currency you had to go through a string of applications. Now Taiwan has the opposite problem: too much foreign money pouring into Taiwan...

The Taiwan dollar advanced 1.6 percent to NT$30.144 versus the greenback as of 10 a.m. local time, according to Taipei Forex Inc. That’s the biggest one-day gain since January 2000. The currency reached NT$30.04 on Nov. 5, the strongest since March 2008.

The reason? Bob Bernanke's friendship with Wall Street and indifference to Main Street:

Taiwan’s dollar rose the most in a decade on speculation overseas investors will keep pumping funds into local stocks as dollar printing in the U.S. makes more cash available that can be invested in higher-yielding assets.

The government said after the market closed yesterday that it will limit foreign ownership in the island’s debt as it strives to curb the inflows from abroad, sending bonds lower today. The currency ended little changed yesterday after rising as much as 1.7 percent as traders said the central bank intervened.

This led to foreigners buying $300 million more of Taiwan shares than they sold, driving the TAIEX up. In addition to the dollars flooding the world, the local Central Bank's policy of raising interest rates is also attracting foreign money. The Taiwan Central Bank is not in a good position. If it drops interest rates it makes credit cheaper, fueling the local property bubble and driving inflation up, but if it raises interest rates hot money floods in from abroad, pushing up the NT and hurting exporters. The Economic Daily News pooh-poohed the government's reaction, calling for a more serious response.
In response, the central bank has repeatedly bought U.S. dollars near the end of the foreign exchange market's trading day to lower the price of the Taiwan dollar, resulting in severe fluctuations of its exchange rate.

The closing price carries no substantive significance because it does not reflect actual transaction prices recorded during the five-hour trading session on the Taipei foreign exchange market. It is widely known that the exchange rate will rise again to reflect its market price the next morning. The central bank's adjustment is, therefore, merely a waste of effort.
Robin Kwong wrote in his blog column in the Financial Times....
The data also suggests that the island’s exporters have been sheltered by the central bank. Even at T$30 to the dollar, the TWD-US exchange rate would only have risen 6 per cent since August, when it stood at T$31.91. This volatility was “not very big” and has so far had no significant impact on exports, according to Lin Lee-jen, director of the finance ministry’s statistics department.

Taiwan’s central bank says it allows the Taiwan dollar exchange rate to float freely and would only take action in the event of “excessive volatility due to seasonal or irregular factors”. However, traders chatter that the central bank is an active participant in the forex market: indeed, little else could explain the Taiwan dollar’s frequent falls at the close of trading days.


That is evidence that the most important line of defence is not the Ma Defence Line but the Perng Defence Line - named after central bank governor Perng Fai-nan. The Taiwan dollar has never risen above T$30 since Perng took office in 1998, and exporters have reason to be grateful.

The Economic Daily News and Financial Times essentially present the same analysis -- at the end of the trading day the Central Bank acts to protect exporters by forcing the NT dollar back down -- on paper. But the hot money will continue to flow in, forcing the NT back up. The papers also reported that Taiwan had set limits on how of its debt can be owed by foreigners, though I can't see how they can be enforced. Can someone explain that to me?

Central Bank director Peng is fairly independent of the KMT, I've heard from those in know. He was appointed to the post by Lee Teng-hui in 1998.

In related news, Lien Chan, the KMT heavyweight and two-time presidential loser, said that Taiwan had been invited to join the Trans-Pacific Partnership (TPP), a US-backed regional trade initiative. But government spokesmen said that Taiwan had merely expressed interest in doing so.

ADDED: Good comments below.
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Okami said...

Taiwan is/has depressed its currency for decades. What's happening is the more nationalistic/clued in elements of the Bernanke group realize that no matter what they(Japan, Korea, China and Taiwan) are going to be buyers of US debt. Euros don't buy anything and anyone who needs money is a complete basketcase. US buys things from export-oriented economies and is the base currency for commodities, hence why China wants commodities priced in anything but dollars.

The problem with the export oriented economies is they are are command and control economies. This is why any threat is suitably veiled. This is why they set limits on the types of debts foreigners can hold, but in reality the money isn't from foreigners it's from Taiwanese. The Taiwanese just run the money through an offshore subsidiary and avoid the taxes/questions making the cash look foreign when in reality it's just overseas earning being brought back home to be invested in the local economy in stocks and real estate. If the govt was displeased, they would simply freeze the assets under some suitably sounding excuse. Most worthwhile companies in Taiwan are listed on the American stock exchanges as ADR's.

This brings the next problem of artificially low exchange rates, which is that it depresses consumer choice and demand due to anything foreign being more expensive and thereby shielding local manufacturers from competition to make them improve. China Petroleum on the other hand isn't complaining at all and I wouldn't be surprised if they and other state owned companies who purchase dollar-denominated goods coordinate their purchases of dollars with Taiwan's Central Bank to depress the value of the NT.

I'd love it if you could find something on how much Asia lost on the US mortgage backed security debacle.

Cue 1990's Japan before the bubble burst. I'm just wondering whose shoe and when that shoe and many others are going to drop. Because when you inflate your money supply as Taiwan has done, leading to bubbles, cheap lax credit and limited investment opportunities, the only ending is a very bad one.

Michael Turton said...

Yes, I agree with much of this analysis.

I think Asia didn't get smacked so hard by the mortgage bubble because the banks are so stiffly state-influenced. IMHO the damage occurred among individual investors when Lehman and other firms collapsed -- I know two wealthy families who lost a large chunk of their fortunes.

TicoExpat said...

"At the top of the spire is a statue of the angel Moroni, facing west inviting all of the Chinese on the mainland to come."

There is a typo here...

Oh, and Michael, now that sugar and soya beans prices are on teh rise, affecting small enterprises here like breakfast stores and bakeries, local consumption will shrink even more, me thinks.

Michael Turton said...

Yes, Tico, the word "Moroni" has an extra "i".

With income inequality on the rise, and the government doing nothing about joblessness, I think we can expect things to worsen. We need a government that actually gives a shit about the island...


Long time reader and sometimes anon commenter said...

Come on Michael. Don't pull some intellectually lazy lawn chair out and just blame Wall Street.

There are many things going. First, the NT is only in theory a free-float currency. The Central Bank does a lot to make the NT track the Yen and the Dollar (more so the Yen). As the Yen has risen, the Central Bank has allowed the NT to rise. So you'll have to look at all the reasons the Yen are rising and the Dollar is not (Japan has crazy amounts of debt and an inept government so whatever criticism you want to throw at the US had better not apply to Japan).

Second, the dollar has long-term downward pressure, but so do many other major currencies, especially the near-bankrupt European PIGS states (Portugal, Ireland, Greece, Spain) + Italy. And in many ways, they are worse off. So Taiwan, by virtue of being not that bad and exports going gangbusters is going to face a lot of upward pressure on the NT regardless of whether your accusation that Bernanke is in bed with Wall Street has any merit.

Last, the artificially depressed currency means Taiwan is selling its blood and sweat, and land, water, and clean air for far too cheaply all in the name of global trade an enriching the capital of Taiwan. But is that anything of a problem in Taiwan? Taiwan's rich people having it too hard?

It's been long time that the pendulum swing the other way and that Taiwanese labor, whether that means engineers slaving away at designing cutting-edge circuits or Taipei taxi drivers or traditional rice farmers in Tainan. Make capital work harder--make it compete more; bring in the Japanese and American and European businesses to make the Taiwanese bosses shake in their boots--the rising NT goes a long way towards remedying this longtime inequity.

Anonymous said...

We need a government that actually gives a shit about the island...

That's not likely to happen. Tsai recently said that the DPP will follow pretty much the same economic policies as the KMT, so even a change of government won't make a difference. If there were any change, it might even be for the worse if economic and trade relations with China returned to pre-2008 levels under DPP. I don't think Tsai is quite as inflexible as some in her party though in regards to China, so if the DPP get up in 2012 and she can keep the radicals in line, it will probably just be more of the same, economy-wise.

Okami said...

In barely related economic news Ron Paul is expected to be the chairman of the subcommittee that oversees the Fed.

I haven't had time to think this out yet, but it should be entertaining nevertheless. If Ron Paul gets his Federal Reserve audit, I expect the next 2 years to make the last 10 look like a kumbaya lets-all-get-along party.

Roy Berman said...

Yes, Tico, the word "Moroni" has an extra "i".

The angel Moroni is the patron angel of the Mormon Church, which they are named after. (Their informal name anyway.)

I'm surprised you didn't learn that at some point with the massive swarms of missionaries that roam across Taiwan!

Roy Berman said...

Anonymous: . If there were any change, it might even be for the worse if economic and trade relations with China returned to pre-2008 levels under DPP.

Considering that trade with China rose at a fast clip throughout the Chen administration, I suspect that your other prediction of similar policy, but different rhetoric, is more likely to be true.

jerome in vals said...

France opens sensitive question: who should attend Nobel ceremony honoring Liu Xiaobo

My just posted comment:
"Government representatives turned "salesmen" used to deserve only contempt.

How the staid mores of international relations have changed! Our political elites have downgraded themselves to mere "salesmen" at the beck of corporate money. That the focus of our political elites on behalf of our corporate elites is presently China is immaterial.

Why? Because before WWII, the same vested interestests sold out to Adee. And Third-World-Communist curmudgeon-turned-Nazi Zhongnanhai, aware of the advantages to be derived from connecting its pool of slaves with those immoral "johns", is playing this scenario to the hilt.

For Europe to retake the higher moral ground, we, the people, should demand that not merely our diplomats, but our very heads of states collectively attend this year Nobel prize ceremony.

Any head of states gone AWOL on this duty to both his/her people and the enslaved Chinese people should be flushed down into the Zhongnanhai cesspool. Strip them of their immunity and nationality and pack them off to Beijing.

When Zhongnanhai is saddled with this influx of stateless "political" refugees, how will it deal with them? Let us turn the tables on the Zhongnanhai Madams and their "johns".

Words fail me in mouthing out my aggrieved contempt. Check and make sure that your language encoding is set on Unicode (UTF 8), because I will wind up the present rant with a few key-words:

Chamberlain, 腰抜け, Daladier, 売国, Quisling, 売国奸.

Michael Turton said...

Roy, subtract the "i" from Moroni and what do you get?

Michael Turton said...

I haven't had time to think this out yet, but it should be entertaining nevertheless. If Ron Paul gets his Federal Reserve audit, I expect the next 2 years to make the last 10 look like a kumbaya lets-all-get-along party.

They won't let him audit the Fed. He's all sound and fury, signifying nothing.

Anonymous said...

Dr. PHD Danielson's Danish article would have been BETTER if he admitted that both the Epoch Times and New Tang Dynasty Television are FALUNG GONG not telling readers this, perhaps he does not know himself, he is guilty of disinformation as well. Danielson, w ake up, sir!

RE: in his oped "the EU appears to have failed to behave as an international leader by embracing China’s censorship. A few days before Liu Xiaobo (劉曉波) was declared the winner of the Nobel Peace Prize, the EU apparently limited press freedom in an embarrassing event involving two China-critical media, the Epoch Times and New Tang Dynasty Television. Both media were denied access to a press conference between the EU and China in what looks like a quiet agreement with China. Access was allowed when other media interacted, but the press conference was subsequently canceled."


Michael Turton said...

Ummm.... it isn't relevant what organization owns the media. What is relevant is the EU's moral cowardice.