As Emerging Markets Vie for Foreign Money, Taiwan Turns It Away

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While most emerging markets are jostling for foreign funds before the U.S. Federal Reserve starts raising interest rates, Taiwan is turning them away.

The island introduced limits on foreign investment in the corporate bond market Tuesday, a move analysts said is aimed at curbing inflows that have pushed up the Taiwan dollar. Foreigners piled $70 billion into the island in the first quarter, even with existing caps on purchases of government notes, money-market instruments and derivatives.

As China opens up to foreign money managers like never before and India eases restrictions on overseas bond investors, the priority for Taiwan policy makers is making sure currency strength doesn’t harm the island’s exports. Cash has been pouring in amid government forecasts for the fastest economic expansion in four years.

“The impact of the Fed raising rates will be greater for weaker economies, which face a higher risk of outflows,” said Chu Yen-min, president of KGI Securities Investment Advisory in Taipei. “Funds will move to the U.S. but, relative to most emerging markets, it’ll be better for Taiwan.”

Taiwan held its benchmark interest rate for a 15th quarter in March, resisting a global wave of monetary easing that has seen more than 20 central banks cut rates this year. The government raised its 2015 growth forecast to 3.78 percent in February versus a projection of 3.5 percent in November.

New Restrictions

The island’s currency surged 1.4 percent in the past three months in Asia’s best performance. It has strengthened 2.1 percent against Japan’s yen and 0.8 percent against South Korea’s won, threatening exporters with competitors in the two countries. The local dollar rose 0.4 percent to NT$31.058 against the greenback Wednesday, Taipei Forex Inc. prices show.

Taiwan’s Financial Supervisory Commission will cap overseas investors’ holdings of company debt and bank debentures at 30 percent of their Taiwanese securities from Wednesday, according to a document sent to lenders and obtained by Bloomberg News Tuesday. Previously, there was no limit. Such buyers’ holdings of government bonds, money-market instruments and derivatives are already restricted to 30 percent.

China has expanded quotas for foreign investment in its securities and started an equity link with Hong Kong to draw funds to its capital markets. It has also used the daily yuan reference rate, which restricts the currency’s moves to 2 percent on either side, to stabilize its exchange rate and deter outflows. In India, overseas investors who buy debt outside auction quotas can now reinvest sale proceeds on the same day, according to people familiar with the matter.

Track Record

Taiwanese authorities have a track record of taking steps to deter currency speculation and reduce volatility. The country’s stock exchange revoked the registration of a foreign institutional investor for the first time in 2013 for parking funds without using them to buy shares.

The island is welcoming some forms of foreign investment. The FSC said Wednesday that an exchange link connecting the stock markets of Taiwan and Singapore will start on July 1.

Still, the restrictions on corporate bonds may push up yields on local-currency debt maturing within two years because such notes are popular with foreign investors, said Morgan Tsai, a debt trader at KGI Securities Co. in Taipei.

Taiwan’s five-year sovereign bond yield rose 1 basis point, or 0.01 percentage point to 1.007 percent on Wednesday, Taipei Exchange prices show. About 70 percent of economists surveyed by Bloomberg this month predict the Fed will raise rates in September.

“As fund inflows have been strong recently, the move was probably to restrict the channels through which foreign investors can park their funds,” said Woods Chen, an economist at Ta Chong Bank Ltd. in Taipei. The government is “also hoping to alleviate the ample liquidity,” he said.

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