Taiwan’s transformation into the world’s second offshore yuan center, after Hong Kong, will give central bank Governor Perng Fai-nan ammunition in his fight against currency appreciation.
SinoPac Financial Holdings Co., overseeing the island’s biggest yuan bond fund, and Uni-President Assets Management Corp., part of a Taiwanese conglomerate, say they will consider shifting more investments into higher-yielding assets denominated in China’s currency as officials finalize a clearing agreement first signed in August. Taiwan’s 10-year debt yields a record-low 1.13 percent, compared with the 3.58 percent rate on similar-maturity Chinese government securities.
With China accounting for the largest share of Taiwan’s overseas sales, the introduction of yuan deposits on the island will encourage local exporters to keep more revenue in the Chinese currency and cool demand for Taiwan dollars, according to Uni-President. Taiwan’s dollar has strengthened 3.6 percent against the greenback this year and traders say Perng, central bank governor since the 1998 Asian financial crisis, has intervened to stem gains most days in the past five months.
“Banks might offer high yuan deposit rates to attract funding,” Samson Tu, a Taipei-based fund manager at Uni-President, which manages $700 million of assets, said in an Oct. 30 interview. “From a long-term perspective, that’s going to draw money from the Taiwan dollar base.”
New Exchange Rate
Taiwan’s dollar lost 0.4 percent against the yuan last month, paring its advance to 2.7 percent this year. Since China revalued its currency in July 2005, the island’s dollar has weakened 18 percent against the yuan, while the Japanese yen and the Singapore dollar posted gains of 5.2 percent and 3.4 percent versus the Chinese currency.
A yuan clearing agreement signed by both governments on Aug. 31 paved the way for the island’s corporations and individuals to set up accounts in the Chinese currency. The pact allows interbank trading of the renminbi, creating a new exchange rate for the currency. Previously, trading of the yuan was allowed only in Hong Kong and China. The yuan is a denomination of China’s currency, the renminbi.
While the island appointed Bank of Taiwan as its clearing bank in September, Perng said on Oct. 29 that the deal will only take effect once China selects its clearing bank after the 18th Communist Party Congress that starts Nov. 8. The island’s own yuan spot rate will be called “CNT,” Perng said on Aug. 31.
Funds in Taiwan can currently invest in the yuan in Hong Kong by setting up accounts in the city, while onshore asset managers are only allowed to sell Dim Sum bond funds on the island that are settled mostly in Taiwanese dollars.
By allowing the yuan to be traded onshore, the currency will become more accessible to asset managers as well as corporations and individuals, Dariusz Kowalczyk, a senior strategist at Credit Agricole CIB in Hong Kong, said in an Oct. 26 interview.
“People may want to save in the CNT because they probably think the Chinese currency will be, in the long-run, stronger than the Taiwan dollar,” Kowalczyk said. “They may want to diversify and have exposure to the Chinese currency. It will help to keep the appreciation of Taiwan’s dollar in check.”
Taiwan’s trade surplus with its cross-strait neighbor was $78.7 billion in 2011, the biggest of any economy with China. Two-way trade rose 10 percent to $160 billion last year, according to Chinese government data.
The island’s gross domestic product rose 1 percent in the third quarter from a year earlier, after shrinking 0.18 percent in the previous three months, official data show. China reported that its economy expanded 7.4 percent last quarter, the slowest pace in more than three years. The Chinese government is confident of achieving annual targets, Xinhua News Agency reported Premier Wen Jiabao as saying last month.
Taiwan’s dollar has risen 12 percent against the greenback since the end of 2008, buoyed by monetary easing in the U.S. that has increased the amount of dollars available to be invested in higher-yielding emerging-market assets. South Korea’s won has strengthened 15 percent over the same period. The North Asian nation produces many of the same goods as Taiwan such as electronics.
Perng, who told an annual meeting of the Asian Development Bank in May 2010 that emerging-market economies should adjust policies to address “disorderly” currency moves and consider capital controls, limited foreign investment in government bonds and money-market products that year to counter gains in the Taiwan dollar. His 15-year tenure, the longest for a central bank governor among Asian economies tracked by Bloomberg, ends in February 2013.
A slower appreciation of the island’s currency would help local exporters compete. Taiwan’s overseas sales fell in seven of the past nine months, official data show.
The Central Bank of the Republic of China (Taiwan) has intervened to stem advances in the currency in late trading on most days in the past five months, according to traders who asked not to be identified, citing their firms’ policies. The monetary authority’s mandate is to keep relative exchange-rate stability and to intervene in the event of abnormal moves, Perng said Sept. 26 in Taipei.
“When the market opens, I think there’ll be a lot of interest from investors to shift their Taiwan dollar assets into yuan,” said Vanessa Wu, a Taipei-based bond fund manager at SinoPac Securities Investment Trust Co., which oversees NT$50 billion ($1.7 billion) of assets. “All wealth management companies here are trying to be the first to tap this yuan market.”
In Singapore, which is also trying to position itself as an alternative offshore yuan center, the nation’s surging dollar may hamper its goal as locals opt to keep their savings in a faster-appreciating currency, according to Bank of China Ltd. Singapore’s dollar has advanced 5.9 percent against the greenback this year, according to data compiled by Bloomberg.
In U.S. dollar terms, investors will earn 5.9 percent on yuan assets including interest income by the end of 2013, compared with 1.9 percent for Taiwan dollar assets, according to analysts’ forecasts compiled by Bloomberg.
Ruled separately since 1949 when the Nationalists fled to the island after a civil war with Communist forces, Taiwan restricts mainland investment in certain industries and limits the number of tourists visiting from Asia’s largest economy. China claims Taiwan as a province and has vowed reunification by force if necessary.
Taiwan’s offshore banking units held 17.5 billion of yuan deposits at the end of August, more than three times the amount at the start of the year, central bank data show. In Hong Kong, deposits have reached 546 billion yuan since being first allowed in 2006.
Some 38 percent of Taiwanese with liquid assets of at least NT$3 million are interested in setting up yuan accounts within the next six months, and over 70 percent were attracted by the prospect of appreciation, according to a HSBC Bank (Taiwan) Ltd. report released Sept. 4.
Yuan deposits may comprise 10 percent of total funds in Taiwan in two years, The Bankers Association of the Republic of China said in a statement on Sept. 19. The island has $1.1 trillion in its banking system, according to data compiled by Bloomberg.
“If you have a target of 10 percent of the total deposit base to be in CNT in a short period of time, that’s a lot less demand for Taiwanese dollars,” Andy Ji, a Singapore-based foreign-exchange strategist at Commonwealth Bank of Australia, said in a Oct. 25 interview. “I’m sure Taiwan won’t mind having a weaker Taiwan dollar because it runs a very large trade surplus with the mainland.”