Taiwan Today

The sustained expansion of Taiwan trade and overseas travel has led to a growing demand for the ROC government to relax controls on the outflow of the New Taiwan dollar, and to allow it to become an international currency. In response to such a call, Samuel Shieh, governor of the Central Bank of China, said that the internationalization of the NT dollar "can not be realized unilaterally." He added that it depended on whether the currency can be widely accepted as a payment instrument in the international business community.

Governor Shieh was responding to lawmakers at a recent hearing in the Legislative Yuan. The legislators were urging the Central Bank to set a timetable for the internationalization of the NT dollar. Shieh said that the NT dollar is already on its way to becoming a regional currency, and pointed to the growing circulation of the currency in mainland China, Hong Kong, and many Southeast Asian countries.

The total amount of NT dollars being circulated in the region is not known, because government authorities have never before compiled statistics on the outflow of the local currency. It was only from January 1991 that the Central Bank began to keep track of the amount of NT dollars leaving Taiwan. According to Central Bank figures, NT dollars brought to Hong Kong, mainland China, and Southeast Asia from January to May 1991 totaled NT$28.4 billion (about US$1.07 billion). The figure is by no means insignificant, when compared to the amount circulated at home. As of the end of June 1991, an estimated NT$445 billion (or US$16.8 billion) was circulating in Taiwan.

The large NT dollar amounts circulating in Hong Kong, mainland China, Indonesia, the Philippines, Malaysia, and Singapore have much to do with the rapid increase in trade and investment activities on the mainland and in Southeast Asia over the last few years. Swelling numbers of Taiwan businessmen are visiting these places. "Many businessmen, as well as tourists, prefer to bring NT dollars with them during periods when the local unit is strong," said a Central Bank official. And it is for the same reason, the official continued, that people and commercial establishments in mainland China and in Southeast Asia accept payments in NT dollars. He noted that keeping NT dollars has become worthwhile, as the currency has appreciated with Taiwan's sustained growth in trade surplus.

But in the view of C.C. Pan, an economics professor at Soochow University in Taipei, despite growing overseas acceptance of the NT dollar, the current circulation in Southeast Asia and mainland China can only be considered as "small and limited trade." He stressed that the NT dollar is still far from becoming a regional or international currency. "When we call a currency an international currency, it means that it has met at least two conditions: it is being widely used in international business transactions, and foreign central banks like to reserve their foreign exchange in that currency," Pan is quoted as saying in a China Times report on the internationalization of the NT dollar.

It is not easy, however, for a currency to be widely used in international business transactions. Even the Japanese yen and the German mark, both of which are major world currencies along with the US dollar, are not used as widely as the greenback in global trading. According to Paul C.H. Chiu, deputy governor of the Central Bank, only about 30 percent of the two countries' foreign trade is settled in their own currencies. Everything else is quoted in US dollars. But for Taiwan, only an estimated 1 percent of its annual foreign trade, worth more than US$140 billion in 1991, is quoted in NT dollars.

Some analysts take this to mean that the vast majority of international traders are not yet ready to accept NT dollars as payment for their sales to Taiwan. Yet there are also many analysts who say that the NT dollar's failure to receive wider world acceptance as a payment instrument is largely due to severe government restrictions on its outflow. They argue that since the NT dollar is backed by an expanding economy and political stability, it carries no credit risks for its bearers. But the restrictions are a hindrance. One existing regulation, for example, stipulates that each departing traveler can take out no more than NT$40,000 (approximately US$1,500). Another rule prohibits non-resident foreign banks from opening NT dollar accounts in Taiwan. Since this restriction denies these banks access to NT dollar funds, they cannot provide NT dollars to customers in need of the currency.

Chen Mu-tsai, director of the Monetary Affairs Department of the Ministry of Finance (MOF), believes that liberalizing the two restrictions will substantially contribute to the internationalization of the NT dollar. Officials at the MOF and the Central Bank, the two institutions that have jurisdiction over the NT dollar's movement out of Taiwan, remain divided in their views toward liberalization.

Some MOF officials, including Chen, say there is no need to maintain the NT$40,000 limit now that the government has extensively liberalized foreign exchange controls. And once the limit is removed, it will only be necessary for the government to require travelers to declare the amount of NT dollars they are bringing out of or into Taiwan. This would help the Central Bank monitor the movement of NT dollars. On the other hand, Central Bank officials, such as deputy governor Chen S. Yu, contend that the bank cannot allow the unrestricted flow of NT dollars out of Taiwan. They argue that no country in the world would permit their currency to be taken abroad so freely.

But it looks like the Central Bank and the MOF have narrowed their differences on the issue. Governor Shieh recently revealed that the two organizations have agreed to gradually raise the traveler's limit to NT$100,000 (about US$3,800). No date has yet been set as to when the new limit will be effective. MOF officials are also leaning toward the early lifting of the ban prohibiting non-resident foreign banks to open NT dollar accounts. But Central Bank officials say liberalizing the regulation remains a policy goal; when it will be implemented depends on the direction of Taiwan's overall economic development. In short, the Central Bank remains reluctant to actively promote the use of the NT dollar abroad, as remarks by Governor Shieh at the Legislative Yuan hearing indicate. "We won't readily move to internationalize the NT dollar. And even if we wanted to, we would have to do it gradually," he said.

Two major concerns explain this hesitancy. Central Bank authorities are concerned that allowing the NT dollar to be freely circulated in world markets could have adverse effects on the bank's implementation of its monetary and exchange rate policies. In a sense, internationalizing the NT dollar means that foreign banks may offer NT dollar deposit and loan services in their home countries. Thus the Central Bank cannot use its legal reserve requirements or discount rate adjustments to influence interest rates, as it is able to do in Taiwan. This could weaken its ability to control the growth of the money supply. Also, once the NT dollar is freely circulated overseas, it would be difficult—if not impossible—for the Central Bank to monitor the volume of NT dollars actually used abroad. A miscalculation of the overall amount circulating could mislead the Central Bank when it adjusts its monetary policy.

Beyond the possibility that internationalization of the NT dollar would weaken the Central Bank's power to effectively control the money supply, the Central Bank is also concerned that it would reduce the bank's influence on the NT dollar's exchange rate. Once the currency is made available for use overseas, its exchange rate will reflect changes in world markets. This will make Central Bank intervention difficult. It was for this very reason that the United States once strongly pressed the ROC to internationalize the NT dollar, because it thought the local unit was persistently undervalued by the Central Bank. In the view of Washington, without Central Bank intervention, the NT dollar would be better able to find its real value in the marketplace. A reasonably valued NT dollar would help reduce Taiwan's trade surplus with the U.S.

Lately, the U.S. has not been pressing as strongly for the ROC to liberalize controls on NT dollar movement, as Taiwan's trade surplus with the U.S. has been rapidly declining in the last two years. But within Taiwan, the call for internationalizing the NT dollar is growing. Legislators, bankers, traders, and economists say that it is necessary and beneficial for Taiwan, which trades with some 120 countries and is logging increasing overseas investments, to have an internationally convertible currency. Say one local banker, "If exporters can quote their prices in NT dollars to overseas buyers, it will help them hedge against losses resulting from exchange rate fluctuations. And if businessmen can spend in NT dollars while traveling abroad, it will save them the trouble of changing currencies."

Some observers also criticize as overcautious the Central Bank's concern that allowing overseas circulation of the NT dollar will have a negative effect on the bank's monetary and exchange rate policies. In the China Times report mentioned earlier. Professor C.C. Pan referred to the United States, noting that there are almost as many US dollars circulating in foreign countries as there are within the U.S. "But we have not seen that the U.S. has ever suffered any major economic problems as a result," he said.

Those who favor liberalizing controls on NT dollar movement say that it is necessary not just to pave the way for internationalizing the currency, but more important, for the government to realize its goal of developing Taipei into a regional financial center. A ranking Central Bank official agrees. According to H. Chen, deputy general manager of the Central Bank's Foreign Exchange Department, foreign banks are essential to Taipei's development as a financial center, and these banks will need to use the local currency. "Our inability to help them meet this need will hamper their willingness to do business here," Chen said. "It is for this reason that we are planning to permit nonresident foreign banks to open NT dollar accounts in Taiwan." But Chen also stresses that this is a long-range policy. "Its implementation," he adds, "depends on our progress in promoting Taipei as a regional financial center, and on our overall economic situation."

Analysts agree that there is a growing need for Taiwan to allow its currency to be circulated overseas. But for the NT dollar to become widely accepted as an international currency, it must first have the backing of a strong domestic economy and political stability. It must also become a currency preferred by businessmen abroad. Liberalizing restrictions hampering the NT dollar's overseas circulation would be the first step toward the internationalization of the NT dollar. Such a liberalization is also needed to promote Taipei's plan to become a regional financial center. It seems practicable, therefore, to make relaxing the outflow of the NT dollar less than a long-range policy goal.—Osman Tseng (曾慶祥) is a senior journalist, based in Taipei. •