Thread by @Brad_Setser

Should the world -- and Taiwan's own citizens -- care about the large undisclosed forward book of Taiwan's central bank?

cfr.org/blog/what-does…

This is joint work with @stwill1; a .pdf version of the blog is available at Concentrated Ambiguity.

concentratedambiguity.wordpress.com/2019/10/15/sha…

@stwill1 Factoring in the undisclosed swaps position of the Central Bank of China (Taiwan's Central Bank) would imply that Taiwan has frequently intervened by more than the U.S. Treasury's 2% of GDP threshold.

@stwill1 Taiwan's current account surplus obviously far exceeds 2% of its GDP, so Taiwan has frequently met two of the Treasury's three criteria (so at a minimum it should be on the Treasury's monitoring list).

@stwill1 I personally don't think countries with large current account surpluses and heavy intervention should get a free pass from the Treasury just because of an under $20b bilateral surplus.

The bilateral trade balance is by far the least important indicator!

@stwill1 But Taiwan needs to watch out -- its bilateral surplus with the US is heading up (trade diversion from the trade war), so its ability to avoid an automatic designation under the mechanical application of the three criteria hinges on keeping its intervention under 2% of GDP

@stwill1 . @stwill1 and I have laid out transparently the basis for our assertion that the Central Bank of China has a large undisclosed forward book (b/c of swaps it does with the banks/ lifers). I personally don't think Treasury should continue to give Taiwan the benefit of the doubt

@stwill1 Far more importantly, the Central Bank of China has -- through heavy management of the Taiwan dollar -- encouraged excessive risk taking in foreign currency by both Taiwanese households and Taiwanese financial institutions.

@stwill1 Taiwan's financial sector is in a bit of a hole, thanks to its large open position in fx --

But the usual advice when you are in hole is stop digging!

@stwill1 Finally, many thanks to @stwill1 for all of his work on this project.

This is the last post in our series of 6 posts on Taiwan's central bank and its interaction with the growing foreign currency exposure of Taiwan's financial system.