Asia crisis prompts caution call in Taiwan

Asia crisis prompts caution call in Taiwan

TAIPEI (Reuters): The financial crisis first raged through Southeast Asia, engulfing Thailand, Malaysia, the Philippines and Indonesia along the way.

The Hong Kong's stock market endured its biggest point fall in history while its currency came under assault and staid Singapore saw its share index scorched to a 57-month low.

Even Taiwan, with its mighty central bank as guardian, felt the heat of the region's worst financial crisis in decades when its dollar came under sustained attack.

And that has led officials and analysts to urge caution over Taiwan's plan to junk the mechanism it used most deftly to fend off the financial flames -- currency and capital controls.

Central bank governor Sheu Yuan-dong led the chorus on Friday, saying in a newspaper interview that Taiwan's target of attaining completely liberalized international capital flows by 2000 "must be taken step by step."

"To avoid becoming a center of financial instability, we must consider our priority of avoiding the negative impact of liberalization," Sheu told the Commercial Times.

The central bank has so far parried the sharpest blows of the Southeast Asian financial crisis.

While currencies have plummeted up to 30 percent or more since July, the Taiwan dollar has eased only about 10 percent since April thanks to dogged defense by a central bank armed with foreign exchange reserves of US$80 billion. It has even appreciated against the yen and mark.

In the face of intense speculative pressure, the bank dug in its heels for most of October, convincingly holding the line at T$28.5 to the U.S. dollar.

Just as that rate seemed to have been steadied, the bank abruptly dropped its defense on Oct. 17, allowing a modest Taiwan dollar slide, but warned it would intervene again if "abnormal" factors emerged to attack the currency.

Short of blatant tampering, the central bank places plenty of subtle curbs on the currency market. For example, analysts say the central bank still influences commercial banks' ceilings on daily currency transactions even where such caps are technically determined by each bank.

"The central bank gets to review the ceilings commercial banks set for themselves for their own risk management," said Norman Yin, a professor at the National Chengchi University and an adviser to Taiwan's top economic policymaking body.

"This kind of firm control is what separates Taiwan from the Southeast Asian countries, and the financial crisis shows how dangerous it could be to lift restrictions before an economy is ready to handle the shocks," Yin said.

If Taiwan's foreign exchange controls are less than transparent, its restrictions on foreign equity investments and capital flows are crystal clear.

Foreign funds in the island's stock market are capped at 30 percent even after a recent loosening aimed to boost sagging prices.

The finance ministry limits ownership of any listed firm by a single foreign fund at 15 percent. Any single foreign fund can remit no more than US$600 million into Taiwan.

But it was another restriction that treats foreigners and locals alike -- the daily seven-percent limit on the movement of the benchmark index -- that had investors breathing relief following Hong Kong's 10.4 percent crash on Thursday.

In contrast to the regional panic, Taiwan's stock index defied the rest of Asia by rising during Hong Kong's meltdown.

On Friday, Taiwan's index fell a comparatively mild 1.35 percent to close at 7,719.04.

Stock analysts said central banker Sheu's caution on convertibility was warranted given Asia's regional malaise.

"If Hong Kong loses 10 percent, you should not go around saying you're going to lift restrictions on your own market," said Neal Stovicek, an adviser to Taipei's National Securities.

But ultimately, Stovicek said, Taiwan's liberalization must continue for the economy's own good.