Foreign Exchange Reserves Reach New High; Risk Management Required

Foreign Exchange Reserves Reach New High; Risk Management Required
China Times editorial (Taipei, Taiwan, ROC)
A Translation
July 18, 2014

Summary: Given our huge foreign exchange reserves, we should be thinking on a grander scale. We should be thinking about how to make the best use of our foreign exchange reserves, This would increase the public welfare, and contribute to national security and stability.

Full Text Below:

As of late June, Taiwan's foreign exchange reserves amounted to US $ 423.454 billion, Foreign bonds and shares amounted to US $ 301.6 billion. Both reached new highs. Overal Asian foreign exchange reserves have reached a new high of US $ 7.47 trillion. In 2013, Asia accounted for 70% of all new foreign exchange reserves the world over. That included Taiwan, Hong Kong, Singapore and South Korea. All continued to establish new highs. Taiwan's foreign exchange reserves topped the four Asian tigers. The Mainland's foreign exchange reserves are approaching US $ 4 trillion.

Foreign exchange reserves are increasing. Most governments and most people see that as a good thing. It represents increased national wealth and increased national influence. It helps the government withstand financial crises. It reduces the impact of sudden capital flight. But excessive foreign exchange reserves make management of central bank foreign exchange reserves more difficult. This includes write-off costs, opportunity costs, and balance sheet risks. Large foreign exchange reserves can also create the illusion of safety in financial markets. They can reduce the incentive for financial reform, or delay it. Even worse, they can influence currency demand and supply decisions, especially in a floating exchange rate regime. That can complicate monetary policy decisions.

In recent years, real estate prices on Taiwan and the Mainland have skyrocketed. Some attribute this to the accumulation of large amounts of foreign exchange reserves. The real cause may be hot money made available by U.S. Quantitative Easying (QE). Foreign exchange reserves increased simultaneously, suggesting an equivalent increase in our own national currency. The speed and scale of the central bank write off was dwarfed by the increase in foreign exchange. This led to a substantial increase in the money supply, to abundant liquidity, and to low interest rates. Financial asset prices naturally increased. This imperceptibly accelerated the deterioration of society wide income distribution.

Financial asset prices can lead to a wealth effect. They can stimulate consumption and investment and promote economic growth. But on the whole, they tend to result in bubbles. They do more harm than good to a country's economic development. They are far less important to the real economy than financial asset price speculation. This is especially true since the United States released news that QE may cease by the end of this year, Absent the injection of massive liquidity, how long can the financial asset bubbles hold? That is truly worrisome. An asset bubble burst could usher in a new round of global financial crises. In other words, the rapid accumulation of foreign exchange reserves by Asian countries could conceal enormous asset bubbles.

The global financial situation is optimistic but contains hidden risks. Those in power cannot afford to take these lightly. They must take precautions and develop workarounds. For example, they must use fiscal or monetary policy, or even financial or tax reform, to cool down the overheated housing and stock markets. They must cool financial asset prices. They must anticipate future asset bubbles. The government must never be blindly optimistic about the economic situation, and goad investors into making investments.

In response to the rapid rise in foreign exchange reserves, the government must consider how it will manage its huge foreign exchange assets. This newspaper has suggested that the government consider setting aside part of its foreign exchange reserves as a sovereign wealth fund. Currently more than 30 countries around the world have sovereign wealth funds, including Singapore, Kuwait, Brunei, Norway, and the United Arab Emirates. Total value is approximately U.S. $ 6.321 trillion. This is roughly equal to the market value of the global stock market.

The ROC has not yet established a sovereign wealth fund. But substantively speaking, it has sovereign fund investments. In recent years, central bank foreign exchange reserve operations have remained stable. The surplus has gone to the treasury. The contribution is NT $ 200 billion per year. This covers fiscal deficits. Suppose we change the operation of sovereign funds? Suppose the central bank comes up with half the foreign exchange reserves? Suppose in conjuction with the four major funds, it comes up with US $ 200 billion? It could organize them into a US $ 400 billion sovereign fund foreign exchange operation. This would enhance its performance and provide universal access. Assuming a 5% annual rate of return, it could inject NT $ 600 billion into the treasury. The government would not need to increase taxes. This could provide the government with the financial resources required for major construction projects and stimulate economic growth. The central bank would no longer need to give the surplus to the treasury, It could concentrate on its four major business objectives, as specified by central bank laws.

Planning for the Mainland led BRICS Development Bank and "emergency reserve fund" is in full swing. Its purpose is to provide funding required for developing countries outside the Infrastructure fund. This will also serve as a mechanisms for the prevention of financial crises. The source of funds in these countries is their huge foreign exchange reserves. Given practical considerations of international politics, Taiwan may not be able to join such an organization, at least not in the short term. But we must nevertheless consider how we can take advantage of our huge long-term foreign exchange reserves. We must cooperate with the Mainland and other Asian countries. We must integrate ourselves into the regional currency swap mechanism. With regional currency swap mechanisms, the bigger the reserve pool, the greater the member state's security. This would enable Taiwan to enjoy greater security.

Given our huge foreign exchange reserves, we should be thinking on a grander scale. We should be thinking about how to make the best use of our foreign exchange reserves, This would increase the public welfare, and contribute to national security and stability.

社論－外匯存底創新高 風險須管理
2014年07月18日 04:09
編輯部

截至6月底，台灣外匯存底達4234.54億美元，外資持有股債及新台幣存款餘額計3016億美元，雙雙創下新高。亞洲整體外匯存底也創下7.47兆美元歷史新紀錄。統計2013年全球新增的外匯存底中，亞洲就占了70%。包括台灣、香港、新加坡及南韓的外匯存底，均陸續寫下新紀錄，其中台灣外匯存底，高居四小龍之首，大陸外匯存底規模更已逼近4兆美元。

面對外匯存底的攀升，政府及民眾大多會以正面解讀，除代表一國財富及國力的提升外，也有助政府提高抵禦金融危機的能力，降低資本突然外逃的衝擊。但不容否認，持有過多的外匯存底，也會導致央行在外匯存底的運用及管理上，操作難度提高，包括沖銷成本、持有的機會成本及資產負債表風險等。此外，高外匯存底可能產生金融市場相對安全的假象，降低金融改革的誘因或拖延金融改革的時程。尤有甚者，甚至影響貨幣供需的決策，特別是在浮動匯率制度下，將使貨幣政策的形成更加複雜。

近年來，台灣及大陸房地產價格飆升，有一說就是緣於外匯存底大量的累積。當然，真正的遠因可能得追溯自美國QE所產生的龐大熱錢。由於在外匯存底累積的同時，意味著等值本國貨幣的釋出，在央行沖銷速度及規模遠不及外匯增加態勢下，將造成貨幣供給大幅增加。游資充斥，配合低利率的條件，金融資產價格自然水漲船高。無形中，也加速整體社會的所得分配惡化。

金融資產價格的上漲，雖然可以產生財富效果，刺激消費與投資，帶動經濟成長，但整體而言，其所形成的泡沫，對一國經濟發展是弊大於利，因為對實體經濟的幫助遠小於金融面的資產價格炒作。尤其是美國已釋出消息，可能在今年年底完全結束QE，在缺乏龐大流動性的挹注下，被吹大的金融資產泡沫還能撐多久，著實令人擔憂。一旦資產泡沫破滅，全球可能迎來新一輪的金融危機。換言之，亞洲國家外匯存底的快速累積，其實背後隱含的可能是巨大資產泡沫風險。

面對當前樂觀中帶著隱憂的國際金融情勢，主政者沒有輕忽的本錢，應未雨綢繆、及早研擬因應措施。例如，運用財政或貨幣政策，甚至實施金融或賦稅改革，將過熱的房市及股市降溫，讓金融資產價格稍微冷卻，預為因應未來可能發生的資產泡沫危機。政府絕不應一味鼓吹經濟情勢樂觀，煽動投資者進場投資。

為因應外匯存底的急速攀升，也應積極思考如何管理龐大的外匯資產。本報曾經建議，政府可以考慮提撥部分外匯存底成立主權財富基金。目前全球約有30多個國家設有主權基金，包括新加坡、科威特、汶萊、挪威、阿拉伯聯合大公國等，規模合計共約6.321兆美元，約等於全球股市一成市值。

而我國雖未成立主權基金，卻有行主權基金投資之實。近年央行利用外匯存底穩健操作，盈餘繳庫，一年約貢獻2000億台幣，彌補財政的赤字。若能改以主權基金的模式運作，由央行拿出一半的外匯存底，同時搭配四大基金拿出2000億美元，組個4000億美元的主權基金進行外匯操作，讓績效更提升，全民共享。倘若一年有個5%的報酬率，就有6000億新台幣可以挹注國庫，則政府不但不用加稅，還能作為政府推動重大建設所需的財源，刺激經濟成長，同時央行也可不需再兼顧盈餘繳庫，專心關注中央銀行法賦予的四大經營目標。

由大陸主導的「金磚國家開發銀行」（BRICS Development Bank）及「緊急儲備基金」正如火如荼地進行規畫，目的除致力於資助開發中國家所需的基礎建設基金外，也將作為防範金融危機的機制，其中資金來源就是這些國家龐大的外匯存底。基於國際政治現實的考量，短期台灣或許無法加入這樣的組織，但長期仍可思考如何利用龐大的外匯存底，與大陸及亞洲國家合作，積極融入區域換匯機制。以區域換匯機制的精神來看，若能做大外匯儲備庫，成員國就多一分保障，這樣對台灣的安全就有更深一層的保障。

面對龐大外匯存底，應有更高層次的思維，把外匯存底做最好的運用，一方面為台灣生民百姓創造福利，另方面為國家安全穩定貢獻更大力量。