TAIWAN DISCOURAGES EXCHANGE RATE SPECULATION

UNCLAS SECTION 01 OF 02 TAIPEI 002741

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E.O. 12958: N/A
TAGS: EINV EFIN ECON PINR TW
SUBJECT: TAIWAN DISCOURAGES EXCHANGE RATE SPECULATION



1. (U) Summary. Taiwan's Central Bank of China (CBC) is
trying to discourage exchange rate speculation on the new
Taiwan dollar (NTD) by administrative measures and a
campaign suggesting that, based on economic fundamentals,
the NTD should not appreciate against the US Dollar (USD).
Some US$8 billion may have come to Taiwan in anticipation
that appreciation of the Renminbi could prompt the NTD to
gain strength. Nevertheless, on June 23, the NTD gained NTD
3.5 cents to close at NTD 31.35/US$1. End Summary.

Small Trade Surplus & Large Tourism Outflow
--------------


2. (U) Local newspapers reported June 23 that CBC suggests
that the NTD should depreciate, rather than appreciate,
against the USD. CBC distributed trade and selected balance
of payments data to support its conclusion that the NTD
should not be grouped with other (Asian) currencies likely
to appreciate relative to the USD. The CBC distributed a
statistical table comparing Taiwan's 2005 trade surplus with
the trade surpluses recorded by four other major trading
economies in East Asia. The table showed the following
trade surpluses (in million US$) for the first five months
of 2005:

Taiwan 549
Japan 34,599
China 30,064
South Korea 10,323
Singapore 6,079

CBC officials also told the press that Taiwan residents'
offshore travel spending in the first five months of 2005,
estimated at US$3,000 million, is much higher than the five-
month trade surplus of US$549 million.

Economic Fundamentals Don't Support Strong NTD
-------------- -


3. (SBU) Market participants tell AIT/T that the CBC is
trying to make the case that economic fundamentals, in this
case a small trade surplus and huge offshore travel
spending, indicate that the NTD is not in such a strong
position. In addition, Taiwan's foreign direct investment
(FDI) account regularly posts a large deficit. (Note:
Taiwan's FDI account in the balance of payments accounting
has regularly posted large deficits for several years.
Taiwan's overall services account in the Balance of Payments
table for the first quarter of 2005 shows a net outflow of
about USD 1 billion. End note.)

Speculative Money in Taiwan
--------------


4. (U) Despite CBC's description of the economic
fundamentals, there has been upward pressure on the NTD.
According to newspaper reports, the CBC has attempted to
maintain a stable NTD exchange rate over the past several
months even though foreign portfolio investors continue to
post net stock purchases. According to trading records
compiled by the Taiwan Stock Exchange, foreign portfolio
investors' net stock purchases in the first 22 days of June
2005 totaled NT$98.8 billion (or US$3.1 billion at the
exchange rate of NT$31.3 per USD).


5. (SBU) AIT/T understands that Taiwan officials believe
that a significant part of these foreign portfolio
investment inflows are speculative. Anticipating
appreciation of China's Renminbi, which might prompt the NTD
to gain strength, foreign investors have deposited "hot
money" in interest-free checking accounts. Anticipated NTD
appreciation would bring handsome profits that would more
than cover an apparent interest-rate loss caused by parking
funds in Taiwan checking accounts. Funds now in interest-
free accounts in Taiwan could otherwise be earning 3% from
bank deposits in the Unites States.

CBC Calls
--------------


6. (SBU) Estimates are that hot money in Taiwan is about
NT$170-180 billion (US$5.4-5.7 billion at the exchange rate
of NT$31.3 per USD). This amount is down from previous
estimates of NT$260 billion (US$8.3 billion). The CBC
recently began expressing its "concern" over the
accumulation of funds in interest-free accounts by
contacting fund managers if funds remaining parked in bank
accounts for more than a month. Despite such actions by the
CBC, market participants say that investors continue to park
large amounts in accounts and only use a small portion for
trading in the stock market.

COMMENT
--------------


7. (SBU) The CBC clearly remains concerned about the
quantity of what it views as speculative funds parked in
Taiwan. It has stepped up its efforts to discourage
speculative funds by administrative actions (phone calls to
fund managers) and now a public campaign suggesting that, if
anything, the NTD is overvalued rather than undervalued.
However, the market, probably looking at the broader
economic fundamentals, delivered its judgment by continuing
to buy the NTD, pushing it up 3.5 NT cents to close June 23
at NT$31.35 per USD. End Comment.

PAAL