Taiwan WTO entry expected to boost local currency value

The China Post staff

The entry of Taiwan into the World Trade Organization (WTO) is regarded as a positive factor that will boost the local currency, as the market liberalization it advocates will encourage an inflow of foreign capital, leading to the appreciation of the NT dollar due to rising international demand, a senior currency strategist said yesterday. “The opening of the local financial market is expected to lure a massive amount of capital inflow based on optimism over the island’s economic outlook,” Frank Gong, a senior currency strategist at Bank of America, pointed out yesterday during a financial seminar held in Taipei.

“Taiwan is one of the few Asian countries that is leading the way in the emerging new economic age, and that will be a major advantage for the island in luring foreign investment,” Gong said. He believes that Taiwan’s entry to the WTO will stimulate foreign investors to reallocate their capital in the Asia-Pacific area.

The currency strategist, however, is not so optimistic about the renminbi’s future movement associated with mainland China’s WTO entry. Regarding the current financial situation there, Gong said, a considerable period of time is needed for the mainland’s financial market to become liberalized and the movement of renmnibi during the period is uncertain.

A positive factor for mainland China’s economic prospect is the continuing rapid expansion of its export levels, which recorded a year-on-year growth of 35 percent in the first seven months of 2000. The latest statistics show that the inflow of foreign capital to the mainland has accumulated to US$27 billion so far this year, and the annual capital inflow is expected to reach US$45 billion next year.

Though, Gong noted, restructuring of mainland China’s financial market and of state-run enterprises may have a short-term impact on the overall economic performance, he warned, mainland China’s unemployment rate continues its upward trend.

While remaining positive about the impact of Taiwan’s WTO entry in terms of the island’s economic performance, Gong pointed out that there are two major factors which may shatter market confidence. Firstly, there is the question of the government’s escalating budget deficit, which is predicted to reach 5 percent of the island’s GDP this year, compared to a normal level in industrialized nations of 3 percent.

Secondly, the government may have problems raising sufficient funds by selling its stock-holdings on a lackluster stock market where a rebound is not expected until sometime next year.

Though, Gong said, the current situation in Taiwan is no worse than the twin deficits encountered by the U.S. government in the ‘80s on its budget and on international trade. Thanks to a series of expansionary policies adopted by the Reagen administration, the U.S. government turned a budget deficit into a surplus; the U.S. continues to suffer from a trade deficit.

Comparatively, the situation in Taiwan is far less complicated. Despite the government’s budget deficit, it retains a trade surplus. If confidence in the government’s ability to tackle the deficit problem is maintained, Gong expects an appreciation of the local currency within the coming year.