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

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