Foreign Investor Stock Holdings Value Rises, Central Bank: Short-Term Concentrated Outflows Pose Challenge to Exchange Rate Stability

(CNA) Taipei, July 8 - Recent volatility in the Taiwan stock market has intensified, with foreign investors continuing to sell Taiwan stocks and remit funds abroad, causing the New Taiwan dollar to fall below the 32 mark. The Central Bank admitted that Taiwan's stock market has been active this year, with significant increases in foreign investor stock holdings and trading volumes in the stock and foreign exchange markets. If foreign investors make concentrated adjustments to their positions in the short term, it could exacerbate volatility and increase the challenge of maintaining exchange rate stability.

The Central Bank will present a special report on "Central Bank's Mid-to-Long-Term Response Strategies and Policy Tools Amidst Multiple Risks in the Stock Market, Inflation, Exchange Rate, and Real Estate Market" to the Legislative Yuan's Finance Committee on July 9. The written report was released today.

As hot money continues to flow out, the closing price of the New Taiwan dollar officially fell below the 32 mark this week. Regarding the exchange rate, the Central Bank's written report specifically explained that the outbreak of Middle East conflicts at the end of February this year, coupled with increased demand for safe-haven assets in the international US dollar, better-than-expected US economic growth, and persistent inflationary pressures, have led the market to anticipate a more hawkish stance from the US Federal Reserve's monetary policy. These factors have driven the US dollar to strengthen, rising by 2.68% year-to-date.

The Central Bank further pointed out that with the strengthening of the international US dollar, the exchange rates of major currencies against the US dollar have generally depreciated. As of July 7 this year, the Korean Won, Japanese Yen, and Euro had depreciated by 5.06%, 3.33%, and 2.65% respectively. The New Taiwan dollar's exchange rate against the US dollar depreciated from 31.438 on December 31 last year to 32.143, a depreciation of 2.19%, which remains relatively stable compared to major currencies.

However, the Central Bank admitted that the Taiwan stock market has been active. Compared to the same period last year, the average daily trading volume of stocks and foreign exchange by foreign investors has increased severalfold. Furthermore, funds often enter and exit in a short-term, large-volume, and concentrated manner, increasing domestic exchange rate volatility.

In addition, the ratio of foreign investors' holdings of domestic assets to foreign exchange reserves rose from 191% at the end of last year to 316% at the end of June this year. The Central Bank frankly stated that if foreign investors make concentrated adjustments to their positions in the short term, it could exacerbate domestic stock and foreign exchange market volatility and increase the challenge of maintaining exchange rate stability.

The Central Bank stated that in recent years, international short-term capital movements have become frequent and large in scale, gradually becoming an important factor influencing short-term exchange rate fluctuations. The impact often exceeds that of international trade and economic fundamentals, making the foreign exchange market more susceptible to the influence of rapid cross-border capital flows.

The Central Bank indicated that to track foreign capital flows, it continues to utilize the real-time reporting system for large foreign exchange settlements, monitor foreign investor securities trading and capital flows, supervise custodian institutions and designated banks in complying with regulations, conduct special financial inspections as needed, and implement capital movement control measures when necessary to maintain market order. (Editor: Lin Jia-xian) 1150708

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