Now that the Federal Open Market Committee has decided to implement a second round of quantitative easing, it seems all but inevitable that the greenback will depreciate, as hundreds of billions of U.S. dollars inundate markets worldwide.
Taiwan must be prepared for this enormous influx of liquidity. At the same time, it must not overreact. With its abundant foreign reserves, the nation is by no means a pushover.
Though there is no reason for alarm, it must be admitted that the Central Bank of the Republic of China has had an enormously difficult time over the last few days trying to prevent the exchange level of the New Taiwan dollar from rising too quickly. It has been a hard slog.
What follows are a few observations that should help the general public gain a better understanding of the present situation. They might be of benefit to policymakers as well.
The president, the vice president, the premier and other high-ranking officials from within the government must refrain from commenting on the exchange rate. The government must not send out any signals to financial markets regarding exchange rate targets. Doing so will only play into the hands of speculators, who will be in a no-lose position if they know what to expect.
The government should also seriously consider whether to impose a hot money tax, something that has been recommended by Nobel Memorial Prize-winning economist Joseph Stiglitz, among others. The reason for such a tax is not that the government needs an extra source of income, but that the charge could help deter the arrival of hot money.
When the idea of imposing a hot money tax was first proposed a few months ago, the Ministry of Finance said it was “a long-term measure that could not solve a short-term problem.” In making such a comment, the MOF has shown it does not even understand the basic economic theory behind a hot money tax.
It is hoped that the premier will exert pressure on the MOF to change its mind and come up quickly with a draft bill for the Legislative Yuan to consider. After all, the central bank cannot be expected to maintain a stable currency exchange rate all by itself.
But no matter how hard Taiwan tries, a flood of foreign funds is certain to arrive at the nation’s shores. Some of this money will be used for long-term investments; the rest will most likely end up in the real estate and stock markets.
Relevant government agencies—in particular, the Financial Supervisory Commission, the Ministry of the Interior and the Council for Economic Planning and Development—should start planning on how they will respond once these two markets begin rising sharply.
With respect to the stock market, foreign investors should not be allowed to target specific categories of stocks, because this could cause unnecessary fluctuations in the local bourse.
As to the real estate market, foreign investors will most likely focus their investments on properties within Taipei, the capital, and as a result the city’s property prices will likely to increase dramatically.
Average families, even less able to afford a place of their own, will be driven further into the suburbs. The division between the haves and have-nots will also likely worsen.
To sum up: An increased flow of capital is inevitable, but disasters can be averted if the government responds to the situation calmly. It should avoid sending the wrong message to speculators, deter speculative capital inflows and minimize the impact of hot money on various markets. (HZW)
(This commentary originally appeared in the China Times Nov. 13.)
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