Shadow FX intervention in Taiwan: Mercantilism, excessive private FX risks & the hedging backstop

This is the sixth and concluding chapter in a series on Taiwan’s life insurers and their private & sovereign FX hedging counterparties. It’s the product of a collaboration with Brad Setser of the Council on Foreign Relations.

Chapter VI. connects the rather abstract previous five chapters with the real world by laying out their implications in a variety of dimensions:

  • The impact of far larger than previously known FX interventions by Taiwan’s central bank on the U.S. Treasury’s currency policy.
  • The CBC’s (deliberate?) influence in incentivizing private sector institutions in Taiwan to assume FX risks worth almost USD 500bn (~80% of GDP). Previous Balance of Payment turmoil usually followed FX mismatches originating from the liability side of a nation’s balance sheet – is Taiwan the first case the asset side is the driver?
  • The CBC’s dominant influence in the pricing of X-CCY basis markets in Taiwan. Would lifers’ overseas investments be even profitable without the central banks off-market FX swaps?

A quick personal end note, I can return to markets professionally next year, but details are not yet finally set. Should you find the thinking in these pages helpful, feel free to get in touch.

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Shadow FX intervention in Taiwan: Mercantilism, excessive private FX risks & the hedging backstop

Shadow FX intervention in Taiwan: the CBC’s USD 130+ bn FX swap book

This is the fifth chapter in a series on Taiwan’s life insurers and their private & sovereign FX hedging counterparties. It’s the product of a collaboration with Brad Setser of the Council on Foreign Relations.

Chapter V. forms the core of the essays and seeks to answer how and to what degree the Central Bank of the Republic of China (CBC) is active in TWD FX derivative markets.

Taiwan’s central bank, unusually, does not disclose its position in FX derivative markets, and thus its true foreign exchange exposures. But its true exposures can be estimated using similar statistical techniques applied in evaluating an investment fund’s underlying positions from its profit and loss statements. Based on profits and losses which Taiwan’s central bank does disclose, it appears that its true FX exposures exceed its disclosed foreign exchange reserves by USD 130bn, and perhaps as much as USD 200bn.

Chapter V. has four broad sections:

  • An analysis of the CBC’s own statements about its activities in FX derivative markets.
  • The peculiarities in accounting for FX swaps on a central bank’s balance sheet.
  • A general method to estimate FX derivative exposures a central bank takes based on its published PnL.
  • The application of this model to Taiwan.

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Shadow FX intervention in Taiwan: the CBC’s USD 130+ bn FX swap book

Shadow FX intervention in Taiwan: Counterparties I

This is the fourth chapter in a series on Taiwan’s life insurers and their private & sovereign FX hedging counterparties. It’s the product of a collaboration with Brad Setser of the Council on Foreign Relations.

Given life insurers’ USD 250bn FX hedging needs, chapter IV. examines potential counterparties to these positions by private sector actors. Overseas investors, Taiwanese banks and Taiwanese non-financial corporates are all long USD in FX forward markets – but nowhere near matching lifers’ requirements.

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Shadow FX intervention in Taiwan: Counterparties I

Shadow FX intervention in Taiwan – Current Account surpluses & the Rise of Life Insurers

This is the second and third chapter in a series on Taiwan’s life insurers and their private & sovereign FX hedging counterparties. It’s the product of a collaboration with Brad Setser of the Council on Foreign Relations.

Chapter II. focuses on Taiwan’s Balance of Payments and the transition from the central bank to the life insurance industry recycling the country’s large current account surpluses. A deep dive of lifers’ management of their vast overseas fixed income books follows, with a special eye on the FX risk they lay off in FX derivative markets.

Chapter III. is a quick primer on the instruments most commonly used by institutional investors to manage FX risk, ahead of more technical chapters next week.

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Shadow FX intervention in Taiwan – Current Account surpluses & the Rise of Life Insurers