NT dollar’s drop tied to stocks: official

RESERVES ADEQUATE: The central bank governor rejected claims that Taiwan was facing a cash shortage, saying that its financial system had ample savings

• By Crystal Hsu / Staff reporter

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The New Taiwan dollar’s 3 percent fall this year despite record exports and a widening trade surplus stems from foreign investors cashing in on the local stock market’s technology-driven rally and moving funds overseas, central bank Governor Yang Chin-long (楊金龍) told lawmakers yesterday.

The NT dollar has become one of Asia’s weakest-performing major currencies this year.

Foreign investors have reaped substantial gains from Taiwan’s surging stock market, prompting them to sell shares and rebalance their portfolios, Yang told a meeting of the legislature’s Finance Committee in Taipei.

Central bank Governor Yang Chin-long speaks at a meeting of the legislature’s Finance Committee in Taipei yesterday.

Photo: George Tsorng, Taipei Times

Their withdrawals have added to downward pressure on the NT dollar, offsetting support from the country’s strong export earnings, he said.

The benchmark TAIEX had climbed early this year to a high above 49,000 from about 27,000 points, with much of the rally driven by electronics and semiconductor stocks that are heavily held by overseas investors, Yang said.

As returns accumulate, investors are increasingly inclined to reassess their exposure and lock in profits rather than hold their positions indefinitely, he said.

Foreign investors had recorded fund outflows of US$77.6 billion as of Wednesday last week, the central bank said in a report submitted to the Legislative Yuan.

Yang said that the central bank had intervened in the foreign-exchange market, but rejected speculation that it was defending a specific exchange rate of NT$32.5 per US dollar.

The central bank allows the currency to move with market forces, but seeks to prevent excessive fluctuations, an approach Yang described as the “willow theory.”

The governor also played down the role of the interest-rate gap between Taiwan and the US, saying that US rates had been higher for years amid elevated inflation.

Recent pressure on the NT dollar stemmed more from foreign investors taking profits and transferring funds abroad, while dividend payments by Taiwanese companies had also affected cross-border flows, he said.

Separately, Yang rejected claims that Taiwan was facing a cash shortage, saying that the nation’s financial system had ample savings even as strong economic growth and a buoyant stock market drove up demand for financing.

“I strongly disagree with the claim that there is a cash shortage,” Yang told lawmakers, adding that tighter liquidity at some local lenders reflected their individual funding structures rather than a system-wide lack of money.

Taiwanese banks’ liquidity coverage ratios had averaged at 130 percent in the past, a level Yang considered “unnecessarily high.”

A ratio of about 120 percent would be appropriate, he said.

Tighter liquidity at some banks stemmed from their deposit structures, particularly their heavy reliance on large corporate clients whose funds can be withdrawn at short notice, Yang said.

Banks need to attract more small depositors and issue financial debentures to diversify their funding sources and reduce their reliance on potentially volatile corporate deposits, he said.

Strong manufacturing investment and stock-market activity have increased demand for funds, putting pressure on some smaller borrowers, Yang said.

However, Taiwan’s substantial excess savings remain an important source of liquidity, he said.