Wealth and its Woes

Debt. Today it threatens the financial stability and possibilities for countries around the globe. Among developing nations, Brazil and Mexico head the list, with each owing bank debts of over US$90 billion. Other countries, due to trade deficits, face similar demands on their capital. The United States has become a debtor nation again and most of the Common Market is in the same boat.

The ROC by contrast, has substantial foreign exchange reserves and foreign debt of only US$5 billion. It boasts a savings rate of 32 percent, the highest in the world, with a combined total of US$600 billion in its financial institutions. As of January 10th of this year, the Central Bank of China counted foreign currency exchange reserves of over US$22.5 billion, ranking the nation fifth in the world behind West Germany, the U.S., Japan, and France, and the highest on a per capita basis.

All this, strange as it might seem, creates problems. As the world's economy has slowed in the past few years and prices have fallen, investment and expansion have also dropped. Most people have decided to play it safe and put their money in savings accounts, with few willing to take out new loans. The resulting situation, where financial institutions must pay considerable amounts in interest to depositors while earning little in interest payments from investors, makes bankers uneasy after a while. They have responded in various ways, such as encouraging borrowing and discouraging large deposits.

Some have been quick to seize on the anomalies of this situation. A few companies have borrowed in local money markets at the lower interest rates, only to deposit the funds in the bank and profit from the difference in interest rates. Bankers cry foul when they see this practice and hope banking regulations will be liberalized so that they may be free to set their own interest rates according to the needs of the market.

Foreign currency is controlled by the Central Bank and nine banks so assigned by the government. Those firms conduct ing international trade must buy foreign currency from the nine banks and turn over all of their foreign currency earnings to them. These banks subsequently end up with a surplus of foreign monies, which they often sell to the Central Bank for New Taiwan dollars.

When the American dollar was high, bankers had no objections to holding foreign currency given the profit to be made. Since the Group of Five's decision last September to force down the dollar, the NT dollar has faced pressure to appreciate, however, and owning foreign currency has lost its appeal, a situation aggravated by Taiwan's continuing trade surplus. Notes one banker, "We currently have on account US$600-700 million. Should the Taiwan dollar rise one cent, the bank stands to lose NT$6 million."

The situation leaves banks in a double bind. Retaining foreign currency means facing possible losses, while selling it forces the Taiwan dollar upward, hurting the competitiveness of the nation's exports. The Central Bank would then absorb the discarded foreign currency, but for every American dollar bought, 40 Taiwan dollars are sent into the economy, which worsens further Taiwan's surfeit of currency.

In the past, when the value of the NT dollar was lower and exports were high, a foreign exchange surplus was natural. Recently, however, the NT dollar has risen and exports have slowed, but the surplus has continued to grow. "This is because Taiwan has succeeded with import substitution of processed goods in the consumer goods and machinery industries," says Vincent P. C. Lin, chairman of Fujen Catholic University's Department of International Trade. "Oil, raw materials, and advanced technology account for over 90 percent of our imports. When exports slow, imports drop off as well, meaning the trade surplus gets bigger." If present trends continue, in the next four years, Taiwan's foreign currency reserves will increase by US$30 billion.

But before that day arrives, inflation will probably rear its ugly head, although it has yet to make an appearance. Economists attribute the curious absence of rising prices to the propensity of people here to put their money in the bank when business is poor. But, they warn, when the economic outlook brightens, and investment begins to increase, Taiwan can expect to be faced with a serious dose of inflation.

Given the difficulties brought about by an over-abundance of foreign exchange reserves, one might wonder why the Republic of China has amassed such quantities, but government officials reply that they prefer a surplus to a shortage any day. Taiwan lacks natural resources and is dependent on raw material and machinery imports to continue its present pace of economic growth. Its recent history of ample foreign exchange reserves has given it an excellent credit rating and has attracted substantial investment from multinational firms, not to mention raising the country's international standing.

A glance at South Korea affords a look at how the other half lives. As of last September, South Korea had only US$2.6 billion of foreign exchange reserves. Its foreign debt stands at $45 billion, and the country must achieve an annual growth rate of 7 percent simply to meet its interest payments. Export growth there has also slowed, but payments must be made nonetheless, posing perhaps the biggest obstacle to the nation's economic development.

The notion that more foreign exchange reserves, the better for the country, might be likened to the idea that plumper is better; namely, a concept that is obsolete. Most economists agree that a country should have foreign currency holdings to purchase three to six months of imports. Last year the Republic of China imported US$20 billion of goods, requiring a monthly expenditure of about $1.6 billion. With the Central Bank now holding $22.5 billion, Taiwan has foreign currency holdings to buy thirteen months of imports, truly a situation in need of correction.

Many urge expansion of imports. Lowering tariffs produces cheaper goods and raises the standard of living. Increasing imports serves to give native industries more competition, forcing them to upgrade their product quality and make their operations more efficient. Such a policy would also lessen trade friction with the United States.

Skeptics point out that most imported goods remain raw materials and machinery, and believe increased imports would mainly serve to further expand exports. They discount the effect of relaxed tariffs on consumer spending, noting that saving habits are difficult to change in the short term.

Some economists favor scrapping foreign currency exchange controls and allowing the free buying and selling of foreign monies. Money that would go overseas, they argue, already finds its way there through other channels, and returns on capital invested domestically are comparable to those which can be obtained abroad.

Viewed from another perspective, abolishing currency controls would simply be legalizing Taiwan's thriving black market, whose quotations are printed every day in the Economic Daily News. Statistics show that one million tourists visit the island every year, with less than US$100 million being exchanged for NT dollars according to banks' records, which averages to about US$100 per tourist. Economists scoff at this absurdly low figure, and one estimates the annual turnover in the black market to be in the neighborhood of US$1 billion.

Were Confucius alive today, he would not say, "Worry not about scarcity legalizing but uneven distribution; worry not about poverty but unstability," but more likely advise, "Worry not about sufficient funds but whether they can be used; worry not about wealth but low investment."

[Picture Caption]

As ROC's foreign exchange reserves grow, the nation is presented with a variety of financial options.

"The bank of banks," as it refers to itself, the Central Bank must now cope with a surplus of wealth in the nation's treasury.

The post office is a major savings institution, and given Chinese frugality, depositors usually have to wait in line.

New public investment not only uses up surplus currency, it also contributes to the nation's economic and social development.

Banks hope travel services and outward bound-tourists will siphon off some of the excess foreign exchange.

"The bank of banks," as it refers to itself, the Central Bank must now cope with a surplus of wealth in the nation's treasury.

The post office is a major savings institution, and given Chinese frugality, depositors usually have to wait in line.

New public investment not only uses up surplus currency, it also contributes to the nation's economic and social development.

Banks hope travel services and outward bound-tourists will siphon off some of the excess foreign exchange.