Market worries that the Japanese yen’s depreciation may upset Taiwan’s export-driven recovery are overstated, as the local currency remains undervalued against the yen and the US dollar, Singapore-based DBS Bank (星展銀行) said in a recent report.
The New Taiwan dollar has fallen 2.7 percent this year, closing at NT$29.925 on Wednesday. The foreign exchange market is closed for public holidays and will reopen on Monday.
“Investors’ anxiety about yen depreciation derailing Taiwan’s economic recovery is exaggerated and we maintain our above-consensus growth forecast of 4.2 percent for Taiwan’s GDP this year,” DBS Bank economist Ma Tieying (馬鐵英) said in the report.
The figure is higher than Taiwan’s official estimate of 3.59 percent growth.
The NT dollar remains competitive, because it is undervalued against the yen by 27 percent as of the end of February and by 42 percent against the US dollar, based on the Big Mac index, Ma said.
The local currency has the bias to appreciate going forward, given encouraging economic data and progress in cross-strait economic cooperation, notably the commencement of offshore yuan business, the economist said.
Taiwan can benefit from a weak yen, because Japan is a major supplier of raw materials and capital goods, including chemicals and machinery, Ma said.
Japan accounts for about 20 percent of Taiwan’s annual imports.
A significant portion of consumer goods, such as electronics, cars and food imports, also come from Japan, Ma added.
One interesting development to watch is the possible tightening of NT dollar liquidity as a result of the conversion of NT dollar deposits to yuan deposits, as local banks are offering high yields for yuan accounts, the economist said.
The interest rates for one-year yuan time deposits ranged from 1.1 percent to 2.38 percent among the top five lenders in February, higher than comparable NT dollar deposits at 1.36 percent.
The rate differential could be an incentive for Taiwanese depositors to raise their exposure to yuan assets.
That said, the attraction of the yuan appreciation story to Taiwanese individuals would be relatively limited, Ma said, since the conversion from NT dollar deposits to yuan deposits is capped at 20,000 yuan per person per day.
“The impact of yuan conversion on NT liquidity is mild in the near term,” she said, predicting that yuan deposits would reach 100 billion yuan by the end of this year if the pace of growth is sustained.
Yuan deposits totaled 10 billion yuan in the first month after domestic banking units started conducting yuan transactions on Feb. 6.
Developing the offshore yuan market in Taiwan requires establishing a mechanism to increase the circulation of funds between the nation and China, Ma said.
Participating in China’s Renminbi Qualified Foreign Institutional Investor (RQFII) program could provide a channel for Taiwanese institutional investors to access China’s onshore financial markets, using the yuan funds they accumulate, the economist said.
Still, Taiwan needs to relax restrictions on cross-strait capital flows, she said, as Chinese enterprises and financial institutions — the major bond issuers in Hong Kong — are not allowed to sell bonds in Taiwan or list on the local bourse.
“Greater efforts are also needed to strengthen Taiwan’s financial infrastructure and make its capital market more internationalized and liberal,” Ma said.
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