Taiwan’s central bank tells foreign investors to stop violating capital controls – Financial Times

Report on Taiwan’s Currency Management and its Implications for Sustainable Development

1.0 Introduction: Financial Stability and Sustainable Economic Policy

This report analyzes the recent measures undertaken by Taiwan’s central bank to manage the rapid appreciation of its currency, the New Taiwan dollar. These actions are examined through the framework of the United Nations Sustainable Development Goals (SDGs), highlighting the critical link between stable financial systems and long-term sustainable growth.

• The Central Bank of the Republic of China (Taiwan) has initiated measures to curb currency volatility and speculative capital inflows.
• These efforts are crucial for safeguarding Taiwan’s export-oriented economy, which is a cornerstone of its progress toward SDG 8 (Decent Work and Economic Growth).
• The bank’s strategy involves regulatory enforcement and enhanced communication, reflecting a commitment to SDG 16 (Peace, Justice, and Strong Institutions).

2.0 Economic Context and Challenges to SDG 8

Taiwan’s economic model, heavily reliant on exports, faces significant challenges from the sharp appreciation of its currency. A stronger New Taiwan dollar threatens to erode the competitiveness of its goods on the global market and diminish the value of repatriated foreign earnings.

2.1 Core Economic Pressures

• The New Taiwan dollar has appreciated by over 10% in the current year.
• Exports constitute approximately 60% of Taiwan’s GDP, making the economy highly sensitive to exchange rate fluctuations.
• This situation directly impacts the stability required to achieve SDG 8 (Decent Work and Economic Growth) by potentially undermining job security and economic output in the export sector.

2.2 Drivers of Currency Appreciation

• Repatriation of assets by the nation’s exporters.
• Hedging activities by life insurance firms against a weakening US dollar.
• Speculative financial flows identified by the central bank.

3.0 Regulatory Actions and Institutional Integrity (SDG 16)

In response to these pressures, the central bank is leveraging its institutional authority to ensure market stability and adherence to national regulations. These actions underscore the importance of strong, effective institutions as outlined in SDG 16.

3.1 Key Measures Implemented

1. Enhanced Investor Communication: The central bank has “strengthened communication with a few foreign investors,” urging them to self-regulate after identifying capital inflows that were not directed toward domestic securities as required.
2. Discouraging Speculation: Authorities have actively worked to “close loopholes and discourage speculative shorts,” including issuing warnings to importers, exporters, and investors using complex financial instruments to bet on the currency.
3. Regulatory Investigations: Investigations into the local banking sector were launched to deter speculative activities.
4. Capital Control Enforcement: The bank is enforcing regulations that require foreign capital converted into Taiwan dollars to be used for investment purposes, thereby preventing its use for currency speculation.

4.0 Navigating International Cooperation and Policy (SDG 17)

Taiwan’s central bank is carefully balancing its domestic policy objectives with its international obligations, a key component of SDG 17 (Partnerships for the Goals). The primary concern is to manage the currency’s strength without being designated a “currency manipulator” by the United States, as Taiwan is currently on the U.S. Treasury’s monitoring list.

• Large-scale direct interventions in the currency market are being avoided to maintain a cooperative international stance.
• The bank’s focus on regulatory enforcement rather than direct intervention is a strategic approach to managing its global financial partnerships.
• This delicate balance highlights the interconnectedness of national economic policy and global governance frameworks.

5.0 Conclusion: Aligning Financial Policy with Sustainable Futures

The actions of Taiwan’s central bank represent a concerted effort to maintain economic stability in the face of significant market pressures. By prioritizing regulatory integrity and discouraging speculation, the bank is not only protecting its domestic economy but also reinforcing the institutional foundations necessary for sustainable development. These measures are integral to making progress on several interconnected SDGs, primarily ensuring economic growth (SDG 8), fostering strong institutions (SDG 16), and managing global partnerships (SDG 17).

Analysis of Sustainable Development Goals in the Article

1. SDG 8: Decent Work and Economic Growth

   The article addresses SDG 8 by focusing on Taiwan’s efforts to maintain its economic stability and protect its growth model. The central bank’s actions are aimed at managing the appreciation of its currency, which “threatens an economic model built around the country’s enormous trade surplus” and could make its products “less competitive globally.” This directly relates to sustaining economic growth.

2. SDG 10: Reduced Inequalities

   The article connects to SDG 10, particularly in the context of global financial regulation. The central bank’s measures to “strengthen communication with a few foreign investors” and investigate violations of capital controls are efforts to improve the regulation and monitoring of financial markets to prevent speculative activities that can cause economic instability. This aligns with the goal of ensuring stable and well-regulated global financial systems.

3. SDG 17: Partnerships for the Goals

   SDG 17 is relevant through its focus on systemic issues, specifically global macroeconomic stability. The article details Taiwan’s struggle to manage its currency amidst global financial dynamics, such as a “weakening US currency” and speculative capital inflows. The mention of being on the “US Treasury’s monitoring list for currency manipulation” highlights the need for policy coherence and coordination at the global level to ensure stability.

Identified SDG Targets

SDG 8: Decent Work and Economic Growth

• Target 8.1: Sustain per capita economic growth in accordance with national circumstances and, in particular, at least 7 per cent gross domestic product growth per annum in the least developed countries.
  
  The article highlights that Taiwan’s export-dependent economy is under threat from a sharply appreciating currency. The central bank’s interventions are designed to protect this economic model, where exports comprise “about 60 per cent of GDP,” and thereby sustain the country’s economic growth.

SDG 10: Reduced Inequalities

• Target 10.5: Improve the regulation and monitoring of global financial markets and institutions and strengthen the implementation of such regulations.
  
  The article explicitly describes actions that align with this target. The central bank “strengthened communication with a few foreign investors,” warned against violating “capital controls,” and launched “investigations into the local banking sector to discourage speculation.” These are direct measures to regulate and monitor financial flows.

SDG 17: Partnerships for the Goals

• Target 17.13: Enhance global macroeconomic stability, including through policy coordination and policy coherence.
  
  The entire article is about Taiwan’s central bank attempting to maintain macroeconomic stability by controlling currency volatility. The challenge is framed within a global context, including the risk of being labeled a “currency manipulator by the US,” which underscores the tension and need for policy coherence between major economies. The bank’s efforts are a direct response to global financial pressures to “rein in the New Taiwan dollar’s sharp rally.”

Implied Indicators for Measuring Progress

Indicators for Target 8.1

• Share of exports in GDP: The article states that exports “comprised about 60 per cent of GDP,” indicating its importance. Monitoring this figure would show the health of the economic model Taiwan is trying to protect.
• Real GDP growth rate: While not stated as a number, the central bank’s actions are aimed at preventing a downturn that would be caused by less competitive exports, thus implying that maintaining a stable GDP growth rate is the ultimate goal.

Indicators for Target 10.5

• Implementation of capital control regulations: The article implies this indicator by describing the central bank’s enforcement actions. It found that “foreign capital inflows were not being invested in domestic securities” and warned investors to “make necessary improvements,” showing active monitoring and regulation.

Indicators for Target 17.13

• Exchange rate volatility: The article provides a direct measure of this, stating, “The Taiwan dollar has strengthened more than 10 per cent this year.” Tracking this volatility is a key indicator of macroeconomic stability.
• Volume of speculative financial flows: The central bank’s concern over speculative activities is a central theme. It is taking action against “investors using a combination of exchange traded funds and inverse ETFs to take positions on the Taiwan dollar,” implying that the volume of such flows is a key indicator of instability.
• Trade surplus data: The article mentions Taiwan’s “enormous trade surplus” as a core component of its economy, making it a key macroeconomic indicator to monitor.

Summary of SDGs, Targets, and Indicators

Source: ft.com