Retaining Capital, Now and for a Generation
United Daily News editorial
translated by Bevin Chu
May 31, 2007

The Central Bank recently engaged in a show of strength. It called in its markers in an all out effort to reverse the new lows in NT Dollar interest rates and long-term exchange rates. It attempted to stem the outflow of capital and to keep it on Taiwan. NT Dollar / US Dollar exchange rates have increased rapidly. Judging by key indicators such as the rapid rise in the Interbank Call Loan Rate, the Central Bank has indeed made a real effort in the money market and commodities market. But the Central Bank can do only so much. Its efforts may yield short term results, temporarily damping social discontent. But over the long term, capital flow will eventually revert to basics, to the hard reality of Taiwan's investment value.

Beginning with the loosening of intermediate term foreign exchange controls during the 1980s, Taiwan began experiencing an outflow of capital. Capital outflow was the result of by overseas investment by domestic industry. Taiwan was facing its first wave of industrial restructuring pressure, caused by insufficient land, rising wages, environmental protection pressures, a major revaluation of the NT Dollar, changes to investment incentives, and other overhead cost issues. Mainland economic reform, liberalization, and the development of cross-Straits economic and trade relations added fuel to the flames. Under combined internal and external pressures, offshoring accelerated, leading to debate over the causes of the hollowing out of the manufacturing industry which have continued until today.

This wave of capital outflow is different. In addition to businesses engaging in ongoing offshoring, it includes managed funds seeking higher returns. The scale is larger than ever before, and is now the norm. According to Central Bank estimates, individual investment in foreign securities exceeded overseas business investment in 1996, but generally speaking held steady at approximately 5 billion US dollars. The political regime changed in 2000. Capital flight doubled that year. The year after it exceeded 10 billion US dollars. Last year it amounted to 41 billion US dollars, equal to 14 trillion NT Dollars, over 10% of this year's GDP. The trend continues. During the first quarter of this year the amount of capital outflow was 11.2 billion US dollars, establishing a new quarterly high. Capital flight is getting out of control.

The phenomenon of capital flow seeking maximum advantage along with the new wave of large scale capital flight is closely related to new lows in both NT Dollar interest rates and exchange rates. These new lows harm earnings from NT Dollar denominated assets, leading to capital flight to high rate of return overseas commodities. They also impact public confidence in NT Dollar denominated assets, causing everyone to abandon NT Dollars like worn-out slippers. Financial institutions, businesses, and individuals with the ability to freely allocate their capital can speculate in NT Dollar and foreign currency interest rates and exchange rates, causing a vicious cycle of continued capital flight, falling interest and exchange rates. In fact, for the middle class, whose income growth has remained stagnant in recent years, these new lows are the culprits that are pushing them toward the "M-shaped Society."

Facing ever thornier circumstances, the Central Bank finally acted. Beginning last week, the Central Bank tightened capital supply on the open market. It engaged in large scale selling on the foreign exchange market. It attempted to persuade banks to strengthen their foreign currency hedges, to implement foreign currency trade reporting mechanisms, to synchronize overseas fund collection and applications, to increase interest rates and exchange rates. By the sheerest coincidence, the Interbank Call Loan Rate and NT Dollar exchange rate showed obvious increases, and those playing unscrupulous arbitrage games were punished.

But Taiwan, after all, is still a free market economy. The Central Bank may have a fistful of silver bullets. The Executive Yuan may have a tall stack of chips. But it can only moderate the deviation of interest rates and exchange rates from the market rate, and moderate capital flight. To truly prevent capital flight, it is necessary to increase Taiwan's core competitiveness. Besides interest rates and exchange rates, the key is the market's evaluation of Taiwan's economic potential, including rate of growth, effectiveness of management, social stability, consistency in government policy. These give capital a reason to settle in Taiwan. Otherwise, it's a losing battle. Market driven capital flow is a force of nature, akin to flood waters. The Central Bank may be able to stem the flight of capital for the moment, but not forever.

Furthermore, in an era of economic globalization, capital recognizes no borders, capital flow both in and out is the norm. Taiwan's capital however is subject to a special cross-Straits lock that either stops capital from flowing out once it has entered, or subjects it to burdensome restrictions. This leads to capital unwilling to return once it has left. This weakens the nation's ability to raise capital, and undermines the economy's long term development. The key to allowing capital that has taken flight to return, is a government with a pragmatic and flexible cross-Straits policy.

Original Chinese below:

留住資金：留一時也要留一世
【聯合報╱社論】
2007.05.31 03:49 am

中央銀行近來發威，運用各種可能的籌碼，全力扭轉新台幣利率、匯率長期雙低的局面，企圖減緩資金外流的腳步，把錢留下來。從近日的成果看，新台幣兌美元匯 率連邁升值大步，具指標性的隔夜拆款利率亦飆升，央行在匯市、貨市、行政指導三面出手，果真展現無人能攖其鋒的巨大威力。然而，央行所為畢竟有限，短期或 能收效，暫抑社會不滿氛圍；但長期而言，資金流動趨向終究還是要回到基本面，亦即回到台灣投資價值的現實問題。

遠自一九八○年代中期外匯管制逐步解除起，台灣就已出現資金外流現象。在一開始，資金外流是由企業對外投資帶動，那時台灣正面臨經濟高速成長後的第一波產 業結構調整壓力，例如土地不足、工資上漲、環保抗爭、新台幣大幅升值、獎勵投資條例屆期修正等成本加壓課題；加以大陸經濟改革開放、兩岸經貿關係開展的推 波助瀾，產業在內推外拉下加速外移，也由此引發產業空洞化抑或經濟力延伸的爭論，至今未休。

這一波的資金外流與前一階段不同，除了企業未曾間斷的海外投資布局，還包含眾多追求報酬率的理財性資金，且其規模愈來愈大，已成主流。央行統計，國人對外 證券投資金額於一九九六年超過企業對外投資，但大抵仍維持五○億美元的溫和水準；二○○○年政黨輪替，此一流出規模當年倍增，次年突破百億美元，去年更達 四一○億美元，相當於新台幣一點四兆元，超過台灣今年國內生產毛額的一成。然而，流出趨勢未歇，今年第一季再流出一一二億美元，創下單季最高，資金外流之 勢顯有失控之虞。

從資金流動逐利而居的特性，新一波資金大舉外流的成因，當與近年來新台幣利率、匯率長期「雙低」息息相關；「雙低」不僅傷害了民眾持有各項新台幣資產的收 益，促使資金流向海外的高報酬率商品，更重擊了民眾持有新台幣資產的信心，導致人人棄新台幣如敝屣，且予擁有國際資金調度優勢的金融機構及企業、個人，得 以運用新台幣與外國貨幣間的利差、匯差興風作浪，反向又回來壓抑新台幣雙率的走勢，形成資金持續外流、雙率盤低的惡性循環。事實上，對近年已苦於所得成長 停滯的廣大中產階級而言，「雙低」更無異於將其推往Ｍ型社會下層的新凶手。

面對愈趨棘手的情勢，央行終於出手了。上周起，央行透過公開市場操作緊縮資金供給、在外匯市場大舉賣匯、以道德勸說銀行強化外匯避險、落實外匯交易申報機 制、調控海外基金募集申請進度等行政措施多管齊下，同步拉升利率及匯率，並已奏效，隔夜拆款利率及新台幣匯率都出現明顯的升幅，之前肆無忌憚大玩資金套利 遊戲的業者也慘遭修理。

然而，台灣畢竟仍是自由市場經濟，儘管央行手握銀彈、行政裁量等籌碼，也僅能適度扭轉雙率過度偏離市場常軌的現況，緩和資金外流的腳步。想要真正留下資 金，仍需以強健台灣投資價值為核心，除了雙率環境，最關鍵的還是市場對台灣經濟發展潛力的評價，包括經濟成長實力、企業經營效率、社會制度穩定性、政策一 致性等各個面向的努力，讓資金有駐足台灣的理由。否則，雙拳難敵四手，面對市場決定去留的資金洪水，央行留得了一時，留不了一世。

進一步言，在經濟全球化時代，資金無國界，流進流出本屬常態；只不過，台灣的資金流動平台因加了兩岸關係的特殊閘門，讓資金的流動多了進得來、可能出不去 或運用受限的另層顧忌，以致流出去的資金不願再回來，這是資金外流失衡情勢令人惶惶不安的另一隱憂。長此以往，不僅將削弱國家支付能力，也將衝擊台灣經濟 長期發展所需動能；而讓外流的資金願意回流，關鍵則在於政府必須有務實而靈活的兩岸政策。