Thu, Jun 06, 2019 - Page 12 News List

Taiwan is not a risk to US bonds, central bank says

MARKET DISRUPTOR?The chances of a massive sell-off of US bonds by local insurers to meet redemption needs is low, the central bank said

By Crystal Hsu  /  Staff reporter

The central bank yesterday dismissed a foreign media article saying Taiwan poses a threat to the US bond market, as local insurers hold a significant share of US government and corporate bonds.

“Domestic insurers are incapable of influencing US monetary policy or its bond market given their modest holdings,” the bank said in a statement.

Taiwanese insurers held US$208.2 billion in US government and corporate bonds as of March, accounting for 1 percent of total debts in circulation, the bank said.

The statement came after the Financial Times on Monday published an opinion piece by Robin Wigglesworth warning that Taiwanese insurers could affect US monetary policy by cutting their positions.

Citing JPMorgan, Wigglesworth said that Taiwan has the world’s second-largest financial system relative to its GDP and that its life insurance industry is the biggest, with assets-to-GDP of 145 percent.

Taiwanese have funneled a whopping US$1.2 trillion abroad via Taiwanese financial institutions, and the money has been invested largely in US government and corporate bonds with high credit ratings, it said.

Consequently, Taiwanese insurers hold about 4 percent of the US investment-grade corporate bond market and 14 percent of longer-term corporate bonds, according to JPMorgan.

“If [the] Taiwanese dollar were to strengthen, it could trigger losses far beyond the coupon payments on the bonds, forcing Taiwanese insurers to pull back from the US market,” the article said.

The central bank said that local insurers keep sound risk control and the chance of extreme scenarios, such as a massive sell-off to meet redemption needs, is low.

Local insurers have 49 percent of their foreign-currency investments hedged and the ratio would rise to 75 percent if foreign-

currency insurance policies were included, the bank said.

In addition, the New Taiwan dollar is relatively stable compared with other foreign currencies, the bank said, adding that it would step in to maintain the local financial system’s stability if necessary.

The Financial Times article also pointed out a widening gap between the US dollar liabilities of the insurance sector and the US dollar assets that local insurers have accumulated.

The gap has widened from 34 percent of total balance sheets in 2013 to almost 50 percent today, with the mismatch amounting to US$420 billion, or 72 percent of Taiwan’s GDP, it said.

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