5. Taiwan’s Exchange-Rate Policy and Its Current Challenges

Cross-border capital flows account for a significant share of Taiwan’s interbank foreign exchange transactions, and some active foreign investors play a key role in the total of foreign capital flows. Large and frequent short-term capital movements pose one of the major threats to financial stability in Taiwan. Confronted with this challenge, the Central Bank of the Republic of China (Taiwan), or CBC, employs a range of measures to manage the foreign exchange market and capital movements. This practice fulfils the CBC’s legal mandate of maintaining the stable value of the new Taiwan dollar (NTD) to underpin economic growth in Taiwan. Because of great dependency on imported energy, high foreign portfolio investment, the lack of International monetary Fund (IMF) membership and reserve currency status, Taiwan’s reserve holdings stay at a relatively high level, which provides a necessary buffer to reduce excess volatility in the NTD exchange rate, instead of any attempt at competitive depreciation.