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Commercial Times: Currency exchange rates and capital flow

Commercial Times: Currency exchange rates and capital flow

Taiwan editorial abstract (file 3 of a daily roundup) The unexpected strengthening of Taiwan's currency over the past year has helped stabilize the country's internal capital flow amid the global financial crisis and has dispelled worry about a possible capital outflow to China in the wake of a number of cross-Taiwan Strait market-opening measures.
In 2009, inbound Chinese capital inflow remained limited, but capital infusions from China-based Taiwanese businessmen were extremely remarkable, with the total amount exceeding NT$500 billion.
Although the substantial reduction of inheritance and gift taxes to 10 percent to some extent contributed to the return of Taiwanese capital, the unexpected appreciation of the New Taiwan dollar against the Chinese yuan should be an even more important factor behind of the increase in inbound remittances.
The local currency appreciated from NT$32.86 against the U.S.
dollar at the end of 2008 to NT$32.03 at the end of 2009, marking a 2.59 percent rise.
During the same period, the exchange rate of the yuan rose from 6.8346 against the greenback to 6.8282, increasing only a marginal 0.09 percent.
In terms of direct exchanges between the Taiwanese and Chinese currencies, the yuan actually depreciated against the New Taiwan dollar, from NT$5 to the yuan in early 2009 to NT$4.7 at the end of the year.
As a result, it is more profitable to keep New Taiwan dollar-denomination assets than to keep yuan-denomination ones.
The 2009 experience indicates that the currency exchange rate has helped Taiwan lure back capital from China.
Nevertheless, the central bank should keep in mind that it cannot solely rely on the exchange rate to attract inbound capital flow because a strong New Taiwan dollar could eventually hurt Taiwan's export competitiveness.
After having hovered in a narrow range for almost a year, the yuan is widely expected to rise against the greenback this year. Will such a development trigger a reversal of cross-strait capital flow? How will the central bank cope with such a trend? We hope the central bank can start to chart response strategies as soon as possible.
(By Sofia Wu)




Updated : 2021-10-22 05:40 GMT+08:00