TAIWAN BANKERS PREDICT MAJOR FINANCIAL REFORM
Taiwan is planning to significantly
relax foreign exchange controls within the next few months, but
there is little prospect of a sudden outflow of capital,
bankers and economists polled by Reuters said.
    They said a statement by Premier Yu Kuo-Hua last Friday
that Taiwan might suspend the controls indicated the government
was ready to allow Taiwanese firms and individuals to hold and
invest foreign currency for the first time.
    "There has been a major shift in government policy," said
Liang Kuo-Shu, chairman of the Chang Hwa Commercial Bank.
    Yu said foreign exchange controls, under which all foreign
currency must be converted into Taiwan dollars, might be
suspended if Taiwan's trade surplus grows too large. He said
controls could be retained for use in an emergency.
    Yu said the aim was to reduce Taiwan's foreign exchange
reserves and ease pressure on the money supply.
    The reserves have grown to a record 53 billion U.S. Dlrs,
compared with about 26 billion in late March last year, due to
Taiwan's widening trade surplus. The surplus hit a record 15.6
billion dlrs last year against 10.6 billion in 1985.
    Approximately 95 pct of the surplus was with the U.S.
    The surplus in the first two months of this year rose to
2.73 billion dlrs from 2.02 billion in the same 1986 period.
    Money supply grew by a seasonally adjusted 48.22 pct in the
year to end-february.
    Bankers and economists said they did not believe the
government intended to drop all foreign exchange controls and
allow the Taiwan dollar to be freely traded.
    But they said over the next few months certain restrictions
will probably be eased to allow Taiwanese firms and individuals
to hold part of their foreign exchange earnings for overseas
investment.
    Bankers and economists also said it was likely the
government would lift a ban on investment in foreign stocks.
They said it was uncertain, however, whether investment would
be direct or channeled through government-approved funds.
    Taiwan allowed firms and individuals to invest in overseas
government bonds, treasury bills and certificates of deposit
for the first time last year.
    Bankers said Yu's statment was an indication the government
is becoming increasingly concerned about the threat of
inflation posed by the growing foreign exchange reserves.
    Inflation is now running at about three pct.
    Mounting reserves are also seen as giving Washington
leverage in its efforts to force Taiwan to boost the value of
its currency to reduce the trade imbalance.
    Bankers said dropping foreign exchange restrictions was
unlikely to lead to significant capital outflows because of the
rising value of the Taiwan dollar.
    "All the signs are that capital would move in," said John
Brinsden, manager of Standard Chartered Bank in Taipei.
    The Taiwan dollar has risen by about 16 pct against the
U.S. Dollar since September 1985. It opened today at 34.26
against the American currency.
    Most economists believe the Taiwan dollar will continue to
rise this year on strong U.S. Pressure for appreciation.
    Economists estimate up to five billion U.S. Dlrs of
speculative money flowed into Taiwan last year.
    Yu's statement surprised most local and foreign bankers,
who regard the former central bank governor as a fiscal
arch-conservative. They said it shows Taiwan is determined to
go ahead with wide-ranging financial liberalisation.
    "It's more than a straw in the wind," said Brinsden. "It
indicates that something dramatic will happen."
 REUTER
