Taiwan Steps Up Fight Against Inflows, Raises Rate

Taiwan Steps Up Fight Against Inflows as Interest Rate Raise
Perng Fai-nan, governor of the Central Bank of the Republic of China (Taiwan). Photographer: Maurice Tsai/Bloomberg

Taiwan unveiled additional measures to counter capital inflows as it raised borrowing costs for the third time this year and tightened lending rules to avert a property bubble.

Governor Perng Fai-nan and his board raised the discount rate on 10-day loans to banks by 0.125 percentage point to 1.625 percent. All 14 economists in a Bloomberg News survey predicted the decision, announced yesterday. The central bank increased the reserve requirement on some local-currency deposits by foreigners to as much as 90 percent, effective Jan. 1.

Taiwan joins neighbors from Thailand to South Korea in increasing rates to damp price pressures while stepping up moves to counter inflows stoking currency gains. The local dollar has appreciated the most in Asia against its U.S. counterpart in the past six months, imperiling exports, and rose 3.5 percent today.

“The focus is really on dealing with asset-price inflation, particularly home prices,” said Tony Phoo, an economist at Standard Chartered Plc. in Taipei. A larger interest-rate increase might have “attracted more hot money flows,” he said.

The Taiwan dollar rose to NT$29.170 against its U.S. counterpart at the midday break, according to Taipei Forex Inc. It has risen more than 10 percent over the past six months. The benchmark Taiex stock index climbed 0.9 percent.

The yield on the 1 percent note due January 2016, the most active bond, fell six basis points to 1.092 percent as of 11:37 a.m., according to Gretai Securities Market, the island’s largest debt exchange. That’s the biggest daily drop for a benchmark five-year note yield since Aug. 25. A basis point is 0.01 percentage point.

Discouraging Deposits

The increase in the reserve requirement ratio announced yesterday applies to so-called local-currency “passbook” deposits held by foreigners, which can be withdrawn by the account holder without restriction.

A ratio of 25 percent will apply to existing deposits, while 90 percent will be imposed on any net increase in such deposits after Dec. 30, the central bank said.

The monetary authority also said it won’t pay lenders interest from Jan. 1 on reserves held for deposits from foreigners. It currently pays interest on 55 percent of the reserves.

The reserve-ratio increase “signals the central bank could introduce more tightening tools to combat speculative funds,” said Jeff Chi, a Taipei-based fixed-income trader at Ta Chong Bank. The move has had some impact on today’s trading in the local dollar, he said.

Derivatives Curbs

Currency appreciation risks crimping the trade gains that boosted the economy and helped earnings at companies such as Taiwan Semiconductor Manufacturing Co., the world’s largest custom manufacturer of chips. Exports are equivalent to about two-thirds of gross domestic product.

The central bank said this week it will step up curbs on the use of exchange-rate derivatives to combat currency speculation by foreigners. The island last month also restricted offshore funds to investing no more than 30 percent of their portfolios into local government debt and money-market products.

“The Taiwan dollar’s rise will hurt export competitiveness sooner or later,” Perng said yesterday. The central bank has established a group to study the behavior of hedge funds, he also said.

Officials from Asia to Latin America have sought to curtail fund inflows, complaining the U.S. Federal Reserve’s plan to inject $600 billion into the world’s biggest economy may intensify capital flight to higher-yielding emerging markets.

Home Prices

The central bank tightened the cap on second-home mortgages in the capital, Taipei, to 60 percent from the 70 percent imposed in June, and broadened it to other districts, while also limiting loans using land as collateral to 65 percent of the real estate’s value.

Targeted measures are more effective than rate increases in curbing housing speculation, Perng said yesterday.

Property prices in the capital have advanced 11 percent in January through November to a record, Sinyi Realty Co.’s Chief Analyst Stanley Su said in a telephone interview this week.

Full-year economic growth will exceed 10 percent this year and the island faces inflation risks in 2011, Minister of Economic Affairs Shih Yen-shiang said this week. Inflation quickened to a nine-month high of 1.53 percent last month.

Taiwan has lagged behind some Asian counterparts in raising rates, even after increasing the benchmark by a combined 0.25 percentage point in June and September from a record low. Thailand has lifted its rate by 25 basis points three times this year to 2 percent, and the Reserve Bank of India has increased the repurchase rate by 150 basis points to 6.25 percent.

Recent reports signaled the $355.5 billion economy is weathering the rise in its currency, helped by demand from China, its biggest trading partner.

Industrial production growth accelerated to a three-month high in November, exports increased 21.8 percent from a year earlier and the unemployment rate fell to a two-year low.

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