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Fund reforms aim at weakening NT$

Taiwan's central bank eased limits on overseas investments by mutual funds in an effort to weaken its currency to speed export-led economic growth, analysts such as ABN Amro Bank's Irene Cheung (張雅怡) said.

The changes may also allay criticism from US Treasury John Snow that countries should let markets determine foreign-exchange rates rather than rely on government manipulation.

Fund managers such as Cathay Life Insurance Co (國泰人壽) and Shin Kong Life Insurance Co (新光人壽) will sell New Taiwan dollars to buy assets denominated in US dollars, yen and euros. As a result the central bank may be able to refrain from meddling in the foreign exchange markets to stem the currency's 1.7 percent rise versus the US dollar this quarter.

"The timing is right, because there are a lot of capital inflows into Taiwan," said Cheung, ABN Amro's Singapore-based Asian sovereign debt and foreign-exchange strategist.

As Taiwan's currency has strengthened, the government is "taking this opportunity to open up the capital account."

Taiwan's fund managers, who oversee the equivalent of US$76 billion, can now sell mutual funds denominated in foreign currencies. Regulators earlier this year also raised the percentage of assets insurers can invest overseas and removed the limit on overseas purchases by mutual fund managers.

Loosening controls on investing overseas "eases pressure on the New Taiwan dollar's appreciation," said Peter Redward, a Singapore-based strategist at Deutsche Bank AG, the third-largest trader in the US$1.2 trillion-a-day foreign-exchange market, according to Euromoney magazine.

Redward said the New Taiwan dollar will rise to NT$33.60 by the end of the year, a 1.4 percent gain Friday's NT$34.06 level in Taipei trading.

Investors can now take advantage of higher yields overseas. Cathay Life, the nation's largest life insurer, got government approval to put as much as 35 percent, the maximum allowed, of its NT$1.35 trillion in assets in foreign investments, said Lee Chang-ken (李長庚), chief strategy officer at Cathay Financial Holding Co (國泰金控), the company's parent.

Shin Kong, the country's second-largest life insurer, received the Ministry of Finance's approval to raise their overseas investment portion to 32 percent last week, said Sunny Hsu, accounting manager at the Taipei-based insurer.

Some analysts such as London-based Forecast Ltd's Christy Tan say the changes may not be enough to keep the New Taiwan dollar from appreciating without central bank currency sales.

Easing overseas investment rules "would have a pretty limited effect," said Tan.

Selling the currency is "more direct and efficient" for keeping the local dollar competitive and growing exports. Tan said the New Taiwan dollar may rise to NT$33.05 by the end of the year.

"It is difficult to gauge how much the rule changes will help slow the currency's gains," as it is a long-term regulation, said Cheng Cheng-mount (鄭貞茂), a Taipei-based economist for Citigroup Inc, the world's largest financial services company.

Taiwan can't sell its currency "on a continued basis," he said.

"The central bank will worry about the side effects, so it will hope to use indirect methods to let capital flow outwards naturally and avoid letting the market know it is selling the currency," Cheng said.
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