Is the business world in the ROC like the "boy who cried 'wolf'"?

In January of last year, the value of the New Taiwan dollar was hovering around forty to one U.S. dollar. In August it began to rise, and local entrepreneurs began to cry for help.

At that time the Executive Yuan's Council for Economic Planning and Development suggested that the highest level that local business could tolerate would be 36:1. At that point exports would begin to have problems.

But by the end of last year the rate had shattered the 36:1 barrier; by April it was 33:1 and 31:1 by July. And still, as Vice-Chairman Yeh Wan-an of the CEPD frankly pointed out, "I have not yet seen any obvious situation of bankruptcy."

It fact, according to the U.S. Department of Commerce, Taiwan's trade surplus with the States rose continually, and reached a single month record in June. Furthermore, the ROC's foreign reserves have continued to mount, and all the economic indicators seem normal or even improved.

How can we explain the discrepancy between the fear and the these figures?

In theory, when a country registers a trade surplus, the value of its currency will increase. Internally, lower marginal returns on labor will force an upgrading in the capital intensiveness and technology of industry. Unless this happens, the nation's products will become outdated and uncompetitive.

The rate of 40:1 had been in effect almost uninterruptedly since 1956, despite the ROC's growing economic power. By May of last year the Vice Minister of the Ministry of Economic Affairs was saying the value of the NT dollar should rise "appropriately." The problem is, how much is "appropriate"? Should the NT dollar continue to rise?

It is not a question which can be answered simply "yes" or "no."

The rapid rise of the dollar was especially risky for small and medium-sized exporters. Prices quoted to foreign buyers were predicated on the exchange rate at that time. By the time the payment arrived at a later time, however, it had to be exchanged by the businesses for NT dollars at the new rate. Because this meant less NT than had been expected, the businesses lost money.

This problem was solved by allowing the businesses to exchange their U.S. dollars at the rate effective at the time of the order, though the money was not actually exchanged until after payment had been received.

Other help for Taiwan came from the fact that the NT dollar rose slower against the dollar than the Deutschmark (i.e., the NT dollar fell against the mark). As a result, trade with Europe rapidly increased. Student and labor problems in Korea also led to increased business for the ROC

Despite prosperity, there were problems. Dollars flowed into the country as speculators bought up NT or property in anticipation of the currency's continued rise. Others used false order documents to sell U.S. dollars to the bank at a higher rate, so that they could buy them back later at the lower rate. Bank statistics indicate that foreign exchange volume increased dramatically from February's US$750 million to 3.8 billion in March. The result was a vicious cycle as speculators and others, trying to stay ahead of their falling U.S. dollars, poured them into the ROC, bloating foreign reserves from US$22.5 billion at the beginning of last year to US$62.5 billion by the end of this August. Increased reserves in turn added to the upward pressure on the NT dollar.

In the process it was the the Central Bank, buying and holding U.S. dollars, who lost out, to the tune of "at least NT$300 billion," in one economist's estimate.

One major problem is that if orders continue to pour in, and bring U.S. dollars with them, then someone in Taiwan will suffer a loss; but without orders, businesses will have to close.

Added to this is the recent fall of the mark against the U.S. dollar (which caused the NT dollar to rise against the mark).

The impact of all this? Through June of this year the ROC's trade surplus rose each month. But in July, the rate of "growth" of the surplus was -0.6 percent, calculated in NT dollars.

Textiles are a key ROC export. Yet they are now manifesting the nearly unheard of phenomenon of falling short of filling allotted export quotas. And according to Chen Mi Lee of the Taiwan Footwear Manufacturers Association, orders through August 15th of this year were off one-third from the same period last year. In addition profits have been falling, and some factories have "temporarily stopped work." This has driven up unemployment.

Of course ROC entrepreneurs are not sitting still. Besides measures to improve management, cut costs, and expand and improve product lines, many are investing abroad.

So what should the value be of the NT dollar against the U.S. dollar?

Yeh Wan-an suggests that, in light of the movements of other currencies against the dollar, 30:1 would be an appropriate bottom line. He notes that within the last year the NT has raised 16.6 percent against the U.S. dollar, more than any other currency in the world and a rate twice that of Japan over the same period.

Meanwhile, the currencies of Taiwan's leading trade competitors rose more slowly at rates of 6.6 percent for the Korean won, 0.1 percent for the Hong Kong dollar, and 2.8 percent for Singapore, making Taiwan products less competitive.

Some view the rise of the NT as a blessing in disguise, arguing that the increased pressure on industry will weed out the weaker and less efficient firms. Others point out that the rise of the NT increases the value of people's savings in U.S. dollar terms.

According to the CEPD's chairman, Chao Yao-tung, there is a lag time between the rise of a currency's value and its impact. It will only be after November of this year that the effects will be known, and only then can one judge whether or not current exchange rates are "appropriate."

Businessmen have already often cried "Help!" This time, is the wolf really coming?

Fluctuations in the spot rate and forward rate of the New Taiwan dollar against the U.S. dollar

Source: The Council for Economic Planning and Development, Executive yuan.[Picture]

Fluctuations of Major Currencies Against the U.S. dollar

Source: The Council for Economic Planning and Development, Executive yuan.[Picture]

ROC Trade Surplus Statistics from Jan. --July 1987

Source: The Council for Economic Planning and Development, Executive yuan.[Picture]

[Picture Caption]

The US dollar has fallen continually against the NT dollar, creating lots of problems for the ROC (photo by Chiu Sheng-wang)

Even more communication and discussion will be helpful in solving Sino-American trade problems. (photo by Arthur Cheng)

How much resilience will ROC businesses have in the face of the rise of the NT dollar?