Expressing his concern over rapid global capital flows, central bank Governor Perng Fai-nan (彭淮南) said that adopting selective credit control measures could be an effective way to contain the risk of capital and foreign exchange speculation.
“Faced with a surge in capital inflows, prudential regulations that target specific segments of the economy can play a useful role in dampening the demand for speculative capital,” Perng wrote in the latest issue of the Banker, a London-based monthly publication on global financial affairs owned by the Financial Times, the first time has he written an article for the magazine.
“Hong Kong, Singapore, South Korea and Taiwan, for example, have all recently introduced targeted prudential measures to curb real estate speculation as international capital inflows continue to put upward pressure on asset prices in these countries,” Perng wrote.
Perng said that short-term capital movements were highly volatile compared with long-term foreign direct investment and that large and sudden inflows of foreign capital could result in exchange rates overshooting, a loss of trade competitiveness, domestic credit booms and asset price bubbles.
“Once the economic and financial conditions start to deteriorate, the direction of capital flows will reverse abruptly, with devastating consequences,” he said.
For small countries with deregulated capital accounts, Perng said that a better way to control capital inflows would be to keep the nominal exchange rate flexible, while allowing the real exchange rate to reflect economic fundamentals.
“This will make it less attractive for currency speculators to take advantage of a rigid exchange rate regime and will soften the impact of volatile capital flows,” he said.
To prevent currency speculators from increasing exchange rate volatility, Perng said that the central bank has demanded foreign investors use Taiwanese dollar funds “in a manner consistent with the declared purpose of securities investment.”
A reporting system is also in place to track large foreign exchange transactions, Perng said, noting that the efforts have been effective, as the central bank has the power to carry out target examinations related to the implementation of foreign exchange and monetary policy.
The central bank is scheduled to hold its quarterly board meeting at the end of this month and decide whether to raise its policy rates as the economy continues to recover.
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