Central bank chief calls for Asian FX mechanism

TAIWAN'S central bank governor has called for Asian countries to set up a formal exchange rate coordination mechanism to ensure stable currency relationships and avoid the instability that sudden inflows of capital bring.

In an article for The Banker magazine dated Aug. 30 and released by the central bank yesterday, Perng Fai-nan said that while capital mobility creates many benefits for economies, it can also create instability and worsen crises.

"Regional exchange-rate stability is conducive to promoting economic and financial stability. When exchange rates are stable, lower transaction costs and reduced uncertainty will boost growth in intra-regional trade and investment" Perng wrote.

"Asian countries should set up a formal regional exchange-rate coordination mechanism through which stable currency relationships can be established."

Taiwan's central bank actively manages the country's exchange rate and has taken several measures against short-term capital flows and speculation, keen to protect the exports that are the lifeblood of the $410 billion economy.

Korea, Indonesia and Brazil have also enacted forms of capital control since last year, in part to fend off a potential wave of money looking for growth and returns in countries where growth is outstripping traditional investment markets in Europe and the United States.

Taiwan and Singapore have also targetted property speculation with control measures in recent months to lessen the chances of asset bubbles. Perng, reiterating a view he expressed earlier this year, wrote that large and sudden inflows of foreign capital lead to exchange rate overshooting, loss of trade competitiveness, domestic credit booms and asset price bubbles.

Once economic conditions deteriorate, the money pulls out, "with devastating consequences."

Reuters