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Debunk Myth that Devaluation Could Save Economy

icon2017/05/17
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 Debunk Myth that Devaluation Could Save Economy

China Times Editorial (Taipei, Taiwan, ROC)

May 12, 2017

 Translation of an Except

Since the beginning of the year, the New Taiwan dollar has shown a trend of appreciation; in less than half a year, it has appreciated over 7%, a full tripling of the increase for the whole year of 2016, the only time in more than a decade. It is speculated that there are two reasons: one is the influx of hot money. Between January and April this year, the net flow of hot money to Taiwan reached as high as US$10.6 billion, among which the net purchase of Taiwan stocks reached US$6.74 billion, ranking first among Asian stock markets. Apparently, whether it is global hedge funds or speculative capital, or the return flow of the earnings from Taiwan businessmen on the Mainland for the purpose of avoiding Mainland tax audits, they all played a role of pushing in the process of the New Taiwan dollar’s appreciation during this wave.

Another important reason is the disappearance of the hand of the Central Bank in intervening in the market. In the past, during the course of the New Taiwan dollar’s appreciation, we often saw moves to pull up near the end; recently they disappeared. The market interpretation is that the Central Bank is mindful that Taiwan could be included in the United States’ list of currency manipulators, thus abandoning the normal approach of "preventing appreciation but not devaluation." (The official version is to maintain the dynamic stability of the New Taiwan dollar exchange rate), letting the market determine the exchange rate benchmark. According to the US Treasury Department's report "Foreign Exchange Policies of Major Trading Partners of the United States," owing to the Central Bank’s efforts to prevent the appreciation of the NT dollar, the NT dollar has been undervalued to a degree as high as 26%. When the Central Bank decided not to intervene again, the value of the currency quickly appreciated to what should be the market standard.

From the perspective of long-term industrial development, letting the exchange rates return to the operations of market mechanisms and reducing intervention is perhaps rather the most appropriate approach, because this will induce industries to cope with exchange rate fluctuations on their own by strengthening hedging awareness and measures. The loss of the protective umbrella of exchange rates will also compel industries to upgrade and transform, moving toward the development of high value-added products, and ultimately having opportunities to promote the upgrading and transformation of industries.

It is worth mentioning that letting exchange rates return to the market mechanisms and reducing intervention does not mean that we demand that the Central Bank do nothing at all. Especially in extraordinary times, when momentous changes occur in the international politico-economic situation, or market disorder leads to sharp fluctuations in exchange rates, the Central Bank has to do something. What we mean is that in ordinary times, the Central Bank should not, nor does it need, to frequently intervene in the market, engaging in one-way intervention (such as preventing appreciation but not devaluation), because this will create serious distortions in market prices.

At the moment, Taiwan's global value chain ranks #1 in the whole world, the ratio of import value in our exports reaches as high as 43.5%. When government policy wants to stimulate exports through currency devaluation, it will sharply pull up the import costs for industries, weakening the effect of devaluation. When the positive effects of saving the economy through devaluation cannot be demonstrated, and the negative effects, on the other hand, continue to ferment, the myth of devaluation should have long been debunked. When exchange rates return to the market mechanisms, and industries lose the protective umbrella of exchange rates, then they must be alert; they should upgrade, otherwise, they would be eliminated. When industries accelerate upgrading and transformation of the industrial structure, that will be when Taiwan’s economy has a future to talk about.

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