Taiwan’s central bank may have as much as $130bn in additional undisclosed dollar reserves, according to calculations from Brad Setser of the Council for Foreign Relations.
Hidden dollar reserves of this size would clearly make Taiwan a ‘currency manipulator’ under the US Treasury’s definition, but US-China confrontation may mean the country gets a pass.
The hidden reserves, according to Setser, arise from hedging activity conducted by the central bank. Since the global financial crisis, Taiwanese life insurers have bought huge volumes of offshore dollar bonds over the last decade, and hedged these back to Taiwanese dollars.
The central bank is the main counterparty on the other side of the trade, according to the evidence that Setser lays out, meaning it is selling dollars up front and committing to buy them back later. Life insurers, according to Setser’s data, hedge about $250bn of their $465bn in dollar assets.
“Intervention on this scale meets the classic definition of currency manipulation, and the US administration is certainly worried about the trade deficit… but that’s balanced against the current context around China,” said Setser, a former staff economist at the US Treasury. “There may be pressure not to look too closely at it, and leave Taiwan a bit off the hook because it’s not communist China.”
The US Treasury defines currency manipulation according to three main criteria — a bilateral trade surplus over $20bn, a “material” current account surplus over 3% of GDP, and “persistent” one-sided currency intervention, totalling at least 2% of GDP over 12 months.
The Treasury’s last report on currency manipulation shows Taiwan has $466.8bn of official reserves, which increased $10bn in the previous year. It had a $16bn trade surplus, and a 12% current account surplus. However, the report shows FX interventions of only 0.4% of GDP. The trade surplus is below the $20bn cut off — but any adverse movement in the US-China trade talks could easily push it over the limit.
Because the positions are continually rolled over, they reduce the size of reported reserves — Taiwan’s central bank gives life insurers dollars to buy assets up front, and commits to buy them back later at a predetermined price.
Taiwan is not a member of the IMF, so does not report its derivative exposures according to the standard templates required by the Fund, making it far harder to spot the intervention. But Setser and an anonymous co-author have used regression techniques usually used for figuring out a fund’s exposures to try to work back from the central bank’s profit and loss data to its positioning.
The IMF’s Asia-Pacific division is preparing a big new report on capital flows in Asia, presented on Tuesday at the Annual Meetings in Washington DC. But the authors, contacted by GlobalMarkets, said that a lack of data on hedging flows meant that these could not be properly incorporated into the study — and that Taiwan, due to a lack of disclosure, was excluded from the scope of the study.