Quiet time

Editorial, The Economist, 20 August 1998

THIS summer there may be no more tedious place in Asia than Taiwan. While currency traders in other financial centres are battling turbulent markets, their counterparts in Taipei are desperate for a little action. That Taiwan’s financial markets are unexciting represents a victory of sorts for the island’s central bank, the Central Bank of China.

Since currencies in South-East Asia, South Korea and Japan nose-dived last year, the central bank has pulled out all the stops to keep the New Taiwan dollar steady. It has overtly instructed Taiwanese banks not to lend local currency to foreign banks. It has suspended new issues of local-currency bonds by multilateral institutions such as the Inter-American Development Bank. It has delayed authorisation of foreign-currency mutual funds. And it has introduced enough administrative hurdles to cut the turnover in the interbank lending market by nearly half, to around US$150m a day.

All of this has been designed to prevent capital flight and keep currency out of the reach of foreign speculators. And it has proved successful, at least for now. After sliding for the past year, the New Taiwan dollar has finally stabilised against the American dollar (see chart).

This is an extraordinary achievement, given that the island’s exporters have been battered by the regional crisis and by the strength of the currency both at home and in China, where many Taiwanese companies do their manufacturing. Exports dropped by 8.6% year-on-year in the first seven months of 1998, and more bad news is expected to arrive by the year end. That knocked about 16% off the currency’s value last year. But in recent months the New Taiwan dollar’s fall has all but ceased.

Nevertheless, currency stability has its price. In this case, that means meddling in firms’ financial management with intrusive regulation. The main hedging tool for big Taiwanese corporations, non-delivery forward contracts, was banned in May, leaving firms exposed to huge losses should the currency founder. Corporate foreign-exchange remittances in excess of US$1m must be reported to the central bank, and are likely to be scrutinized for evidence of tax evasion.

Central bank officials are not above telephoning corporate treasurers to urge them to convert their export earnings into New Taiwan dollars. A finance official at one Taiwanese high-tech manufacturer says his firm was forced to spend days locating old trading invoices in a remote storage warehouse because the central bank wanted to verify foreign-exchange transactions made a year ago. We hope they do not plan to do the same thing very often, says the official. Otherwise, we will need to hire a full-time worker just to answer their inquiries.

Perng Fai-nan, governor of the Central Bank of China, is not about to make apologies for the bank’s handling of what he terms an emergency stage. We are trying to get the market back on the right track, he says. So long as he is able to produce exchange-rate stability, most Taiwanese seem more than willing to tolerate his heavy hand.