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Taiwan's Financial
System
Taiwan's highly regulated financial system means that the exchange
rate of the NT$ is also highly regulated. Until April 1989, the
Central Bank set the exchange rate for the NT$. Since April 1989,
the NT$ exchange rate has been set by a panel of nine banks (five
local, government owned and a rotating panel of four foreign banks.
Until about 1985, the exchange rate for the NT$ had stood at $NT40
per $US. Since then, as a way to combat Taiwan's huge trade surplus,
the US has also been pressuring Taiwan to revalue its currency.
This has made Taiwan's exports more expensive and less competitive.
Graph 7 illustrates the effects of this policy on the NT$.
Graph 7
Changes in Real Exchange
Rates for Selected Countries (1980-1990)
Note: 1990 calculated from 1989 figures. Sources:
ADB, Asian Development Outlook 1990, Table A26. ADB, Asian Development
Outlook 1991, Table A26.
Since 1985, the NT$ exchange rate has appreciated by more than
32% against the US$, from 39.849 $NT/$US in 1985 to 26.86 $NT/$US
in 1990. Except Hong Kong, all other NIEs have experienced depreciations
in their exchange rates. Consequently blunting Taiwan's competitive
edge in comparison to its major competitors in the Asian region
- particularly the PRC. The appreciation of the NT$ has had little
effect on Taiwan's export trade, and contrary to expectations, is
still expanding.
Nothing illustrates Taiwan's economic muscle more clearly than
its foreign reserves, now standing at more than US$ 77 billion -
placing it number one in the world. Nonetheless, this increase in
money supply has also led to a rise in inflation. Real estate and
housing, prices have tripled and even quadrupled in some areas of
Taipei during the last two years. Although real estate and prices
of assets have been subject to rapid increases in inflation, the
affects on goods and services has been minimal.
During 1990 inflation stood at 4.4%, and was expected to rise to
7.2% during 1991. Notwithstanding recent figures, inflation in Taiwan
has generally been low since the 1950s. Apart from the oil shocks
during the 1970s, the consumer price index has generally been around
the 3-4% level.
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