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

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