Rating the New Forex System

Q: What are the main contents of the Central Bank's new foreign exchange policy?

A: The Central Bank has eliminated the "daily weighted average rate" (mid-rate) against the US dollar, and at the same time stipulated the daily scope for changes in the rate of trading the NT dollar against the US dollar will no longer be limited. When the Bank and clients exchange, they can figure in the estimated risks and can again refer to the latest situation in the market to set the price.

Q: How did the mid-rate work in the past?

A: This system took the total exchange value of the NT dollar against the US dollar from the previous day and divided it by the total volume to get the average number to serve as the current day's center price. From this price, the rate could only fluctuate up or down 2.25% in any day.

Q: How will the new system affect the value of the NT dollar?

A: The Central Bank has eliminated the mid-rate, but it maintains the limits on "overselling" for each bank, and has increased those for "overbuying." Overselling and overbuying just means selling or buying more than one has.

Under the new system, the overbuying and overselling are different. The overselling is strictly controlled, and causes the pressure to sell on the U.S. dollar to be reduced, deftly reducing the pressure on the NT dollar to appreciate. The overselling limits are more liberal, meaning that the Central Bank's limits on the depreciation of the NT dollar are looser. This point dissatisfies the U.S.

With daily trading each day by banks now reaching hundreds of millions of U.S. dollars, the limits on overbuying and overselling do not fit actual needs; with economic internationalization, the traded amount will be even greater, and these limits should be relaxed step by step. However, they are not totally unneeded. Japan, Korea, and Germany all use them, but the parameters are broader, and don't affect normal business. They are used when the currency rapidly appreciates.

Thus, given the overbuying and overselling limits, the limits for manipulation by the banks is limited, and the exchange rate of the NT should maintain considerable stability.

Q: Does the U.S. believe we should internationalize the NT? What is the connection to economic internationalization?

A: The NT's internationalization will happen sooner or later. The soundness of the forex market is the best start for internationalization, and also a prior condition for Taiwan becoming an international financial center. And there are plans to establish a foreign exchange brokerage house to inform the AP and Reuter of the exchange rate at half-hour intervals.

Already in the mainland and in Southeast Asia the NT is often accepted without being exchanged into the local currency; this is a benefit of internationalization. Some are concerned that after the NT is internationalized, if it is manipulated or speculated on, then this will affect national stability. In fact recently the volume of NT issued has been very large, and it will increase again after internationalization. If the volume issued is enough, there is no way to manipulate the currency.

After internationalization, the NT will not be like the US dollar or the yen and be a global currency; it will be like the Hong Kong dollar, and mainly circulate in Southeast Asia.

Currency internationalization is an important item in economic internationalization. Businessmen can use the NT directly to purchase things, and avoid losses from the exchange rate. It is very helpful for international trade and investment.

Q: It is said the U.S. side is still dissatisfied with our limit of allowing only US$50,000 on remittances to Taiwan; is this limit necessary?

A: The regulation is to limit the inflow of "hot money," but it limits some normal needs, and absolutely cannot restrict hot money, which can come in through other channels like purchasing gold.

Q: What is your assessment of the new forex system? Will the U.S. continue to exert pressure?

A: This system still has flaws, but it is an improvement. As for the U.S., as long as there is a trade surplus, it will be difficult for the NT not to appreciate, things will be difficult. So the best method is for the Central Bank to make the exchange rate system even more reasonable, even more open, completely liberalized, with a reasonable price for the NT decided by the market.