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Central bank’s reserve assets down in Q3 on forex market intervention

Taipei, Nov. 22 (CNA) The reserve assets held by Taiwan’s central bank at the end of the third quarter fell from a quarter earlier due to the bank’s intervention in the foreign exchange market to limit the Taiwan dollar’s depreciation.

The bank’s reserve assets as of the end of September were down by US$4.12 billion from a quarter earlier after increasing by US$3.82 billion in the second quarter, according to data released Monday by the central bank.

It was the steepest fall in any three-month period since the third quarter of 2007, when the central bank’s reserve assets plunged US$7.73 billion from the previous quarter because of the onset of the subprime mortgage crisis in the United States.

According to the central bank, its reserve assets mostly consist of monetary gold (US$4.86 billion at the end of September) and foreign exchange reserves (US$541.11 billion), which includes currency and deposits, securities, financial derivatives and other claims.

During the July to September period, the central bank aggressively sold U.S. dollars to buy the Taiwan dollar, bringing down its reserves of the greenback.

The bank did so to limit the impact on the local currency of a fund exodus by foreign institutional investors, who were dumping local stocks and moving their money into U.S. dollar-denominated assets as the U.S. Federal Reserve hiked interest rates to combat inflation.

In the first nine months of 2022, the central bank’s reserve assets fell U$50 million from the end of 2021, central bank figures showed.

Defending the rare fall in reserve assets, the central bank said other economies in the region faced the same phenomenon.

Japan’s reserve assets fell US$12.2 billion and South Korea’s were down US$28.5 billion in the first nine months, while Singapore reported a fall of US$88 billion in reserve assets in the first two quarters of 2022, the central bank said.

The central bank did not forecast whether further falls in reserve assets were in store, saying only that it would continue to watch how the Fed manages interest rates and whether markets will be affected and do its best to maintain stability in the local forex market.

In the third quarter, Taiwan continued to report a net fund outflow of US$23.85 billion in its financial account, which measures the flow of direct investment and portfolio investment, marking the 49th consecutive quarter of a net fund outflow, the central bank said.

The net fund outflow was mainly due to portfolio investments posting a net asset increase of US$26.96 billion, with a net increase of US$7.75 billion in residents’ portfolio investment abroad as the local private sector increased their holdings of overseas debt securities, the central bank said.

On the other hand, non-residents’ portfolio investment recorded a net fall of US$19.40 billion in the third quarter as foreign institutional investors reduced their holdings of Taiwanese stocks, the central bank said.

Addressing concerns that investors will keep moving funds out of the country and into U.S. dollar-denominated assets, the central bank said net financial account outflows were common in countries such as Taiwan that have a long-term current account surplus.

The same trend is seen in Japan, Singapore, South Korea and Germany, which all have registered long-term current account surpluses, the central bank said.

In the third quarter, Taiwan’s current account, which mainly measures a country’s exports and imports of merchandise and services, registered a surplus of US$20.71 billion, the central bank said.

(By Pan Tzu-yu and Frances Huang)

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