Nov. 11 (Bloomberg) -- Taiwan’s dollar advanced for a sixth day on speculation a ban on foreign investors placing funds in time-deposits won’t deter investors from increasing holdings of the island’s stocks and bonds. Five-year debt gained.

Central bank Deputy Governor George Chou said yesterday the measure will “make sure” overseas investors return to placing their money in Taiwan’s capital markets. Policy makers are determined to keep “hot money” from the currency, said Chuang Rehong, an economist at SinoPac Securities Corp. in Taipei. The benchmark Taiex index climbed 1 percent to its highest close since Oct. 26.

“The effect is negligible in the near-term,” said Wai Ho Leong, a regional economist in Singapore at Barclays Plc. “There won’t be an impact on equities so there won’t be much effect on the Taiwan dollar as well. Given the positive outlook for equities, we could even see some diversion of idle foreign institutional investor cash balances into the equity market.”

The local dollar gained 0.1 percent to NT$32.310 versus the U.S. currency at the 4 p.m. close, after earlier slipping as much as 0.2 percent, according to Taipei Forex Inc. The Taiwan dollar has traded within a range of NT$33 per dollar and NT$32 for the past four months. The currency will appreciate 7 percent against the greenback by the end of 2010, according to the median of 13 forecasts in a Bloomberg survey.

Its 1.6 percent advance this year compares with a 36 percent increase for the Brazilian real and a 34 percent climb for the Australian dollar. Only the yen, with a 0.4 percent gain, has risen less among the 16 most-active currencies.

Bonds Gain

Central bank Governor Perng Fai-nan on Oct. 14 said foreign investors have about NT$500 billion ($15.5 billion) in Taiwan dollar accounts, five times more than he considers acceptable. These funds may be used for purposes other than stock investments, Perng said.

Overseas investors bought NT$10.9 billion more Taiwan shares than they sold today, bringing net purchases this year to $11.8 billion and helping lift the Taiex stock index 67 percent.

“Some investors may interpret that as a positive signal for the stock market because if the inflows can’t be parked in time deposits, some may be transferred into the stock market,” said Ma Tieying, an economist at DBS Group Holdings Ltd. in Singapore.

Five-year bonds advanced, driving the yield to the lowest level in three weeks, on speculation investors were shifting funds to fixed-income securities from time deposits.

“This kind of money will buy government bonds so five years and shorter-term government bonds will benefit,” said Eric Hsing, a fixed-income securities trader at First Securities Inc. in Taipei. “Yields will go down.”

‘Exaggerated Response’

The yield on the 2 percent note due July 2014 fell one basis point to 0.887 percent in Taipei, according to Gretai Securities Market, Taiwan’s biggest exchange for bonds. The price rose 0.0489, or NT$48.9 per NT$100,000 face amount, to 105.0806

The Central Bank of the Republic of China (Taiwan) has been intervening to curb gains in the currency to prevent a slump in exports from prolonging a recession. The island reported on Nov. 9 that October overseas sales declined by the least in 13 months.

The one-month non-deliverable forward contract fell 0.5 percent to NT$32.29 yesterday and rose 0.3 percent today. Forwards are agreements to buy and sell assets at current prices for delivery at a specified time and date. Non-deliverable contracts are settled in dollars.

“The Taiwanese dollar has not appreciated much this year,” Brown Brothers Harriman & Co. wrote in a research report. “This makes the ban on foreign investment in time deposits to curb currency speculation a bit of an exaggerated response. On the other hand, the fact that reserves have increased by almost 23 percent this year suggests that the muted currency rise may also be reflective of the success of intervention.”

Details of Curbs

As the central bank bought dollars, foreign-exchange reserves rose by $63 billion to $341.2 billion in 12 consecutive months of gains, according to a Nov. 5 central bank report. Those are the world’s fourth-largest holdings. Central banks intervene in the currency markets by arranging purchases or sales of foreign exchange.

Foreign investors can’t extend their existing time deposits when they mature, the Financial Supervisory Commission said in a statement on its Web site yesterday.

“If foreign investors bring their money to leave them in time deposits to earn interest instead of investing, then they shouldn’t be here,” Lu Ting-chieh, chief secretary at the financial regulator, said by telephone yesterday. “In Asia, regulators are worried that hot money flowing in would affect the currency and stock markets.”

Time-Deposits

Before yesterday, foreign investors could put their funds in time deposits for three months and were allowed to extend for a further three months, Lu said.

Foreign investors can still invest 30 percent of their remitted funds in short-term financial products that mature within one year, according to the statement.

Taiwan’s economy may return to growth in the October-to- December period after contracting for five straight quarters, the statistics bureau said in August. Overseas sales dropped 4.7 percent from a year earlier in October, the smallest decline since September 2008, the Finance Ministry said.

To contact the reporter on this story: Lilian Karunungan in Singapore at at lkarunungan@bloomberg.net; Weiyi Lim in Taipei at wlim26@bloomberg.net.

Last Updated: November 11, 2009 03:49 EST