Mon, Oct 29, 2007 - Page 8 News List

EDITORIAL: Figures bring mixed blessings

Taiwan's money supply growth slowed last month for a second straight month and reached the lowest growth rate since August 2003, the central bank reported on Thursday.

M2, the broad measure of money supply covering cash in circulation and all deposits, was up 3.47 percent at the end of last month compared with a year earlier, following an annual increase of 4.25 percent in August, the bank's data showed.

A first look at last month's 3.47 percent growth rate -- which fell below the central bank's annual target of between 3.50 percent and 7.50 percent -- raises concern that monetary conditions are a bit tighter than desired, which in theory will lead to an economic slowdown and contractions in financial markets.

But in reality, Taiwan's liquidity in the money markets remains ample because the central bank has used public market operations to drain excess funds from the banking system to help stem inflation.

Furthermore, the significance of the relationship between money supply growth and macroeconomic performance has become weaker in recent times, given that a lot of funds have been moved out of savings and time deposits -- which are included in M2 -- and into stocks, mutual funds and other financial instruments, which are not.

Therefore, the latest money supply data are no cause for concern from the supply side and the bank is likely to wait for the release of more data before finalizing its policy adjustment in its December meeting.

But the figures do confirm an economic scenario where continued capital outflows as well as slower growth in bank loans and domestic investment are here to stay. It is the demand side of the monetary conditions that raises concern.

Central bank statistics show that at the end of last month the annual growth rate of total outstanding loans and investments at major financial institutions was 3.31 percent, lower than a revised 3.77 percent in August. It was the lowest growth rate in three years.

This slower annual growth rate indicates that banks have become more conservative in extending loans after the bad loan problems of the last couple of years. But at the same time, it also shows a lukewarm demand for bank loans from local companies for business expansion or other investments.

Adding more pressure to this scenario was the Cabinet's announcement last week about the lifting of restrictions on stock investments in H-shares and red chips listed in Hong Kong and Macau, as well as in Chinese stocks, by domestic mutual funds.

This example of liberalization was certainly good news for domestic funds and local investors, but it injected some uncertainty into the development of local stock markets, as the government estimates local mutual funds could invest up to NT$40 billion (US$1.2 billion) in H-shares and red chips once the measure takes effect.

While some investors may still favor offshore funds that are not subject to government regulations and can invest in Hong Kong or China at their discretion, the truth is that the recent strong performance of Hong Kong and Chinese stocks may attract more capital outflow if the lack of attractive investment opportunities continues at home.

With continued capital outflows, the momentum of domestic capital markets will be negatively affected and the New Taiwan dollar will face depreciation pressure. That in turn will deter more domestic funds seeking higher yield investment targets.

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