The artificial intelligence wave is sweeping the world, and Taiwan, as the core hub of the global semiconductor industry, has also benefited. The Taiwan stock market has soared past 27,000 points, and its export strength is also the envy of the worl...
The artificial intelligence wave is sweeping the world, and Taiwan, as the core hub of the global semiconductor industry, has also benefited. The Taiwan stock market has soared past 27,000 points, and its export strength is also the envy of the world. However, the British heavyweight journal "The Economist" pointed out that what is less known is that Taiwan has a huge current account surplus, which is the result of the New Taiwan dollar's long-term undervaluation. Although monetary policy has helped Taiwan's export-oriented economy rise, ordinary Taiwanese consumers have not been able to enjoy the fruits of economic prosperity. Instead, they have been punished and financial risks have continued to increase.
Therefore, The Economist calls on the Taiwan Central Bank to relax its control over the New Taiwan Dollar.
Cheap New Taiwan Dollars, Expensive and Dangerous"The Economist" pointed out that Taiwan's huge trade surplus was not achieved overnight. For decades, Taiwan's central bank has been holding down the New Taiwan dollar to enhance the competitiveness of manufacturing exporters. According to the GDP-adjusted Big Mac index, a measure of the deviation of an exchange rate from its underlying value, the Taiwan dollar is 55% undervalued against the U.S. dollar, the highest degree of undervaluation in the world.
Therefore, this century, after excluding entrepot trade centers and oil countries, Taiwan’s current account surplus accounts for the largest proportion of output in the world. In addition, Taiwan's imbalance has further worsened recently thanks to the booming development of artificial intelligence (AI). In October, Taiwan's goods trade surplus reached 31% of GDP at an annual rate, a record high and four times the level before the COVID-19 outbreak. According to the latest data this year, Taiwan's current account surplus has reached 16% of GDP; in comparison, China, a typical surplus economy, has a current account surplus of only 3%.
The problem with all this is that the cheap New Taiwan Dollar has become a costly and dangerous obsolescence.
After all, it no longer brings many benefits as it did in the past. Taiwan is no longer an industrialized economy, and its per capita GDP now exceeds that of Japan. Taiwan has $600 billion in foreign exchange reserves, enough to provide a buffer against shocks from a Chinese blockade or financial crisis. Taiwan's top chip and computer manufacturers, which contribute three-quarters of total exports and nearly half of nominal GDP, can well withstand the impact of a stronger New Taiwan dollar. A 20% appreciation of the New Taiwan dollar may reduce TSMC's operating profit margin by eight percentage points, but even so, its profit margin is still higher than that of Alphabet, the parent company of Google in the United States, or Apple Inc.
"The Economist" pointed out that the costs and distortions caused by the undervaluation of the New Taiwan Dollar are also increasing.
This is equivalent to imposing a tax on Taiwanese consumers. Taiwan relies on imported food, fuel, and commodities. The cheap New Taiwan Dollar causes purchasing power to shift from ordinary households to exporters. As a result, even by the standards of an export-oriented economy, Taiwan saves too much and consumes too little. Since 1998, private consumption has fallen by 20 percentage points as a share of output. The original purpose of this policy was to help Taiwan become rich, but now it has deprived ordinary Taiwanese people of the benefits.
Another distortion is that cheap New Taiwan dollars push up housing prices. Printing money to buy foreign exchange gives Taiwan's financial system ample liquidity and keeps interest rates low. It is this dual effect that has caused housing prices to quadruple since 1998.
The depreciation of the US dollar has plunged Taiwan’s life insurance industry into instabilityIn addition, weak monetary policy also creates risks for the core of Taiwan’s financial system, which is the third distortion.
To recycle its current account surplus, Taiwan relies on its life insurance industry, which has invested nearly $1 trillion in household savings into U.S. government bonds. However, this creates a huge currency mismatch, because the insurance company's liabilities are denominated in New Taiwan dollars but are supported by US dollar assets. Sudden fluctuations in either currency may cause the insurance company to lose money and trigger a financial crisis.
The Economist stated that one of the reasons why this policy continues to this day is the export lobby group. Taiwan's chipmakers may be able to withstand a stronger exchange rate, but current policies support a group of manufacturers with thin profits that would be hit hard if the currency appreciates. Such companies may employ 70% of the manufacturing population.
Another reason is the extraordinary power of the central bank. The central bank purchased foreign exchange assets by printing New Taiwan dollars and obtained huge profits. These profits were turned over to the government and became an important source of fiscal revenue for the government. The amount paid by the central bank accounts for 6% of the total government revenue, and the average in developed countries is only 0.4%. This strengthens the political authority of Taiwan's central bank and allows its powerful central bank chief to silence critics, something the central bank denies.
"The Economist" warned that the situation is becoming increasingly dangerous. One risk is that further depreciation of the US dollar will destabilize Taiwan Life Insurance Company, which is already "too big to fail." Another risk is that U.S. trade surplus hawks may strike again, using tariffs and security implications to force Taiwan to reassess the value of the New Taiwan dollar. This could happen at any time: Unlike South Korea, Japan or China, Taiwan has yet to reach a trade deal with the Trump administration. Concerns about a trade conflict after Liberation Day were enough to trigger a sudden 9% surge in the Taiwan dollar's exchange rate against the U.S. dollar in May.
It is recommended that the central bank follow the example of Singapore and allow the Taiwan dollar to appreciate moderately.The Economist suggests that Taiwan must abandon its outdated economic model and build a more complete model. Taiwan's central bank should gradually relax its control over the New Taiwan Dollar. The transformation process is bound to be full of political and financial risks. Manufacturers that rely on Taiwan's export subsidies to survive will have to downsize or close down. The rapid appreciation of the Taiwan dollar may even trigger the collapse of the life insurance industry, but these risks can be controlled.
Taiwan’s total government debt only accounts for 23% of GDP. Therefore, it has the ability to help unemployed workers retrain. Although insurance companies will suffer losses, given enough time, the transition can be smooth. In addition, the Taiwan Central Bank also has a key advantage: it is much easier to moderately promote the appreciation of the New Taiwan Dollar than to do the opposite. The Taiwan Central Bank can also issue additional New Taiwan Dollars at any time to prevent speculators from betting on the appreciation of the New Taiwan Dollar in advance.
"The Economist" suggests that the key is for Taiwan's central bank to chart a long-term development path for the New Taiwan dollar, just like Singapore did, just as China has successfully allowed the yuan to appreciate moderately in the past few decades. In this way, ordinary Taiwanese people will finally be able to enjoy the fruits of the extraordinary export miracle.
Further reading: Taiwan’s per capita GDP will exceed US$40,000, but do you feel about your salary? The "Spare Ribs Theory" expresses the voice of the people
