Commentary

Beware the presence of ‘hot money’

• Publication Date：11/06/2009
• Source： Taiwan Today
• By  Joyce Huang

Just over a year ago, all the talk centered on how overseas capital had deleveraged and flowed out of Asia. It was if the region’s bourses, including the Taiwan Stock Exchange, were automatic teller machines. This action triggered a free fall in the local bourse and cost many investors dearly.

But today, the tide has turned since Taiwan’s central bank could not help but worry that the domestic capital market is experiencing a resurgence in capital inflows, which it suspected were mainly intended for currency speculation.

Central bank statistics show that as of early October, foreign investors had injected NT$500 billion (US$15.4 billion) into Taiwan, excluding the local bourse. Of this, NT$400 billion remained idle with an unclear purpose of use and was thus considered speculative “hot money.”

The central bank has long recognized the danger of hot money and made it clear that it does not welcome speculative funds. After conducting spot checks into bank accounts, some idle funds have reportedly flowed out of Taiwan since they had no intention of being used to purchase domestic securities.

But what would have happened if the central bank had not acted to combat hot money in the name of capital liberalization? Imagine how big a gain this NT$400 billion-fund would have made if the New Taiwan dollar strengthened from its current NT$32.4 level against the greenback to a near NT$30 level, for a 7.4-percent gain?

The answer: In just a few months, it would be almost US$1 billion. That may only translate into a single-digit rate of return, but it is surely a less risky bet compared to fund investments that had been pushed into the red these days of financial doom and gloom.

But imagine again, how big an exchange loss the nation’s top 100 conglomerates, the majority of which are exporters, would have suffered if the NT dollar advanced “only” 7.4 percent?

Again, the answer: Based on the combined revenues of the top 100 conglomerates last year, this would have totaled an exchange loss of NT$1.4 trillion, or more than one tenth of Taiwan’s annual gross domestic product, if they had not sought to hedge their exchange positions.

So, international currency speculators, mostly in the form of hedge funds, cannot blame the world’s monetary regulators for having driven them out of their markets since it is the regulators duty to protect their own backyards from such attacks.

After all, it was the business model of exchange vultures that caused the 1997 financial crisis in Asia. Their hot money sold short at that time capitalized on the weakening of the region’s currencies.

Neither should the blame be shouldered solely by foreign capital for its decision to make money. Most of the time, it was developing countries that started out seeking to attract foreign capital in an effort to bolster their economies and stock markets. It is also true that this endeavor can result in success or failure since most Asian economies are too shallow to afford roller coaster fluctuations.

So, how can a win-win situation be struck between economies and foreign capital inflows? The stock market is certainly a good way out.

By encouraging foreign investors to take up company shares, they are actually participating in the development of publicly traded companies through capital injection. Powered by refinancing, these companies could generate greater output to accommodate increased orders and thus create more value for their stakeholders both at home and abroad—a positive cycle where no one is loser although it is not without risks.

The property market is also a good option, although overly inflated asset prices could form bubbles that later hurt the economy. There is more risk involved here, but at least it is a fair game.

So, instead of sending excess foreign capital out of a market, Taiwan’s senior bankers have recently advised the central bank to make use of overseas funds by diverting them into local shares or properties.

That is indeed the best-case scenario and excuses the monetary regulator from developing an unwarranted reputation for tightening capital controls. This is criticism that global rating agencies often level when reassessing the local market’s advance status, as Taiwan cannot backtrack on its past achievements in financial deregulation.

But this is actually easier said than done since no managers of foreign funds are fools. If any securities or real estate investments are sure bets, then they would have already plunged in without needing any encouragement from the central bank.

So, it may be for the best that these speculative funds leave if, as Nobel Prize-winning economist Joseph Stiglitz has suggested, they are “no longer perceived as a sign of strength, but as a potential source of disequilibrium.”

—Joyce Huang is a deputy business editor at the English-language “Taipei Times.” These views are the author’s and not necessarily those of “Taiwan Today.” Copyright © 2009 by Joyce Huang

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