Taiwan Central Bank Chief Faces Currency Test in Final Year

Currency volatility, fears of global protectionism casts uncertainty over Taiwan’s outlook.

(Bloomberg) -- Perng Fai-Nan began his tenure as chief of Taiwan’s central bank by defending the currency during the Asian financial crisis. As he approaches retirement nearly two decades later, the Taiwan dollar will again pose a challenge.

Perng, 78, will step down next February after 20 years in his post, making him a longer-serving central bank chief than Alan Greenspan. He’s expected to spend more of his last year working to maintain currency stability rather than fine-tuning interest rates.

Currency volatility and fears of rising global protectionism have cast uncertainty over the outlook for the export-dependent economy, posing a challenge for Perng, who has long emphasized stability as a priority. Taiwan, which counts the U.S. as a key de facto ally and counterbalance to China, is unlikely to want to irk President Donald Trump with its currency.

"The central bank will spend lots of effort in handling the currency," said Rick Lo, chief economist at Fubon Financial Holding Co. in Taipei. "Taiwan will be in big trouble if Trump is determined to involve it in the currency issue."

Willow Branch

Perng once compared the Taiwan dollar to a willow branch -- bending but not breaking despite storms of hot money blowing in and out.

He advocates intervening in markets when exchange rates change too rapidly. As a major supplier to Chinese manufacturers, Taiwan has enjoyed years of trade surpluses and has built reserves equal to nearly 83 percent of economic output, giving it more firepower.

Its use of that power hasn’t gone unnoticed. The Obama administration included Taiwan on its currency watchlist in October, saying it persistently intervened to weaken its value.

The central bank’s usual stance is to maintain currency stability with a managed float regime so the exchange rate "won’t be stiff, nor volatile like wild horses," Perng said in a November speech, according to a text released by the monetary authority.

The Taiwan dollar has endured volatility in recent months. Trump’s protectionist rhetoric and criticism of what he called currency devaluation by trading partners helped fuel a 4.5 percent gain this year, the strongest Asian currency after the Korean won. That followed a 2.4 percent drop from Trump’s November election through the end of the year.

Recent gains in the currency have partly been fueled by expectations Taiwan would scale back intervention for fear of provoking the U.S. A strengthening currency will be the biggest challenge for Taiwan’s central bank this year, but the reserves stockpile helps Perng keep it stable, said Jack Huang, chief economist at Sinopac Financial Holdings Co. in Taipei.

‘Very Strong’

Trump’s nominee for Treasury secretary, Steven Mnuchin was confirmed this week, filling the role of chief spokesman for the dollar. Mnuchin has already sent signals on America’s long-held currency policy, telling the Senate a strong dollar is important over the long term and that it’s currently “very, very strong.”

Taiwan’s economic output has nearly doubled under Perng’s two decades steering policy. Hu Sheng-Cheng, the newest member of the central bank’s policy board, described the economy as a small boat on the ocean, saying Perng helped it sail through storms of capital flows.

"As a smaller economy, Taiwan needs a quick response and an authoritative governor who can give orders," said Hu, who also leads the Chung-Hua Institution for Economic Research.

Perng has faced some domestic criticism. Former lawmaker Hsu Tain Tsair said monetary policy hasn’t adapted to evolving conditions when the economy enters a long downturn, and that Perng should have done more than just maintain stability.

The central bank said it declined to comment on Perng’s management.

His successor will face different domestic and global situations. Exports, a traditional growth driver accounting for more than 60 percent of output, are likely to expand almost 5 percent this year, according to government estimates, after contracting in 2015 and 2016. Economic growth will be 1.9 percent this year and 2 percent in 2018, according to a Bloomberg survey of economists. That’s below the average pace of 4 percent over two decades.

Attention has already begun turning to Perng’s possible successor. Fubon’s Lo said announcing one in May or June would ease concern. He said he doesn’t think President Tsai Ing-Wen would appoint a governor who would surprise the market with aggressive moves.

A better solution would be to select a current central bank official or someone recommended by Perng to ensure a smooth transition, according to Gordon Sun, an economist at the Taiwan Institute of Economic Research, a think tank in Taipei.

Appointing a scholar who lacks hands-on experience can reduce the effectiveness of policy and create uncertainty for markets, Sun said. Stability remains the best choice for Taiwan "unless the president needs a Haruhiko Kuroda" to support monetary easing, he added, referring to the Bank of Japan governor who has embraced unconventional monetary policy.

--With assistance from Karl Lester M. Yap

To contact Bloomberg News staff for this story: Argin Chang in Taipei at, Yinan Zhao in Beijing at, Miaojung Lin in Taipei at

To contact the editors responsible for this story: Malcolm Scott at, Isabel Reynolds, Jeff Kearns

With assistance from Argin Chang, Yinan Zhao, Miaojung Lin