Taiwan Steps Up Easing as Outflows Loom After Yuan Roils MarketsJustina Lee
Taiwan is quietly easing monetary conditions to spur growth and prevent capital flight as its currency plunges after China’s surprise yuan devaluation.
While the island’s central bank has kept benchmark borrowing costs unchanged since 2011, it cut the rate on overnight certificates of deposit for a second day on Wednesday and said it will pay less on 14-day debt at a sale scheduled Friday. The local dollar plunged to a five-year low as the yuan’s steepest slide in two decades worsened the outlook for Taiwan’s economy amid a slump in exports.
“The move reflects that fundamentals are poor,” said Woods Chen, an economist at Ta Chong Bank Ltd. in Taipei. “The central bank is doing something, but it doesn’t want to cut the benchmark rate. But the effects are similar.”
The measures aimed at boosting cash supply came after second-quarter growth slowed to the least since 2012 and exports shrank for a sixth month in July. China’s unexpected decision to cut the yuan’s reference rate by a record on Tuesday roiled global financial markets and risks exacerbating outflows from Taiwan as a weaker currency makes local assets less attractive.
“With Taiwan’s dollar following the yuan in depreciating massively, there’s concern foreign investors will leave,” said Rick Lo, a senior economist at Fubon Financial Holding Co. in Taipei. “The central bank wanted to provide adequate liquidity in the market at this time.”
The Central Bank of the Republic of China (Taiwan), known as CBC, lowered the rate on overnight certificates to 0.384 percent on Wednesday, after reducing it to 0.386 percent a day earlier in its first such cut since 2012, according to people familiar with the matter. The one-day debt is sold daily to adjust cash supply and the rates and volumes aren’t released publicly.
The CBC will sell 14-day certificates at 0.47 percent this week, compared with 0.5 percent when it last sold debt of that maturity in July, the authority said in a statement Wednesday.
Lowering the short-term CD rates is “equivalent to a policy-rate cut,” Lo said.
When asked about the central bank’s latest measures, E-Dawn Chen, director-general at CBC’s banking department, said by phone on Wednesday it will “flexibly adjust” open-market operations according to market changes. He declined to give further details.
The local dollar lost 1.2 percent to close at NT$32.465 versus the greenback, the weakest since June 2010, according to Taipei Forex Inc. It fell 1 percent on Tuesday. One-month non-deliverable forwards tumbled as much as 1.4 percent earlier to a six-year low of NT$32.846.
Global funds sold $271 million of Taiwanese equities on Wednesday, the most in a month, preliminary exchange data show.
Taiwan’s government bonds rose. The 10-year yield fell five basis points Wednesday to 1.24 percent, while that on five-year notes dropped two basis points to a three-year low of 0.85 percent, Taipei Exchange prices show.
China’s surprise change to its currency regime on Tuesday rippled through global markets as investors speculated the move was timed to combat a deepening slowdown in the world’s second-largest economy. The yuan’s tumble roiled Asian currencies and equities again today, even after policy makers said there’s no economic basis for a continuous fall.
The yuan weakened as much as 2 percent to a four-year low of 6.4510 a dollar in Shanghai, after a 1.8 percent tumble on Tuesday, marking the steepest slide in two decades. It closed 1 percent lower at 6.3870.
Taiwan has kept its policy rate at 1.875 percent for a record 16 quarters amid low inflation. Speculation about a cut mounted after second-quarter growth came in at 0.64 percent, missing estimates of all economists surveyed by Bloomberg. The next review is in September.
“The central bank may have cut the rates in open-market operations to help push down the exchange rate,” said Ma Tieying, an economist at DBS Group Holdings Ltd. in Singapore. “Psychologically, it may lead to expectations for a policy rate cut, but it doesn’t necessarily mean there’ll be one.”
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