Thread by @Brad_Setser

Taiwan’s central bank almost certainly has an undisclosed forward book over well over $100b – and has been intervening far more heavily after 2009 than would be inferred from its disclosed reserves.

This is joint work with @stwill1

cfr.org/blog/130-billi…

@stwill1 The true profit and loss statement of Taiwan’s central bank isn’t all that easy to find. But once it has been identified, it implies that Taiwan’s central bank has substantially greater exposure to foreign exchange moves than can be explained by its disclosed reserves.

@stwill1 That yields an estimate of Taiwan’s undisclosed forward book (mostly from FX swaps with domestic counterparties) over time.

@stwill1 A warning: the blog post is longer and far more technical than the Treasury’s foreign exchange report. @stwill1 and I wanted to document the basis for our estimate clearly.
I would recommend reading the .pdf available at Concentrated Ambiguity

concentratedambiguity.wordpress.com/2019/10/09/sha…

@stwill1 The conclusion that emerges from the detailed financial forensics though is straight forward – Taiwan has been hiding the true scale of its intervention.

(And the U.S. Treasury made a mistake in taking the pressure off)

@stwill1 This is an example of the kind of detailed financial forensics I think the Treasury should be doing to determine hidden intervention.

cfr.org/report/foreign…

@stwill1 One important point: the central bank’s undisclosed foreign exchange exposure was estimated independently from the estimate of the size of the lifers hedging need that isn’t covered by the domestic banks/ the market. The fact that they line up is a good robustness test.

@stwill1 I doubt many market participants will be all that surprised by this estimate. I also fully expect Taiwan’s central bank to object to it

@stwill1 But they could settle the question by enhancing their disclosure, and meeting the IMF’s standard for reserve transparency. Asserting that they only have a small position doesn’t, in my view, cut it …

@stwill1 cc: @kgreifeld @colbyLsmith @RobinWigg @tracyalloway

(hoping there is a bit of news value in this post, once the math is digested)