Brad Setser

Follow the Money

Cross border flows, with a bit of macroeconomics

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Do Not Tell Anyone, But the Case For Naming Taiwan a Manipulator Is Stronger than the Case For Naming China

by Brad Setser
December 5, 2016


Taiwan has an extremely large current account surplus. Over 14 percent of GDP in 2015, and over 10 percent of GDP since 2012. (See the WEO data or this chart). Relative to its GDP, Taiwan’s current account surplus is far bigger than China’s current account surplus is relative to its GDP.

Taiwan’s central bank clearly has been buying foreign currency in the foreign exchange market. The balance of payments data shows between $10 and $15 billion of purchases a year in recent years, and roughly $3 billion of purchases a quarter this year (data here).


And Taiwan’s government clearly has been encouraging private capital outflows—notably from the the life insurance industry—largely by loosening prudential regulation, and allowing the insurers to take more foreign currency risk. Private outflows help limit the need for central bank intervention to keep the currency down, but also require private institutional investors to take on ever more foreign currency risk.

China by contrast has been selling foreign exchange reserves in the market to prop its currency up. Right now, the case that China is managing its currency in ways that are adverse to U.S. trade interests is not strong.

Plus, Taiwan’s real effective exchange rate—using the BIS data—has depreciated significantly over the past ten-plus years, unlike China’s real effective exchange rate. The fact that a weaker real exchange rate has gone hand in hand with the rise in Taiwan’s surplus shouldn’t be a surprise, but there are still a surprising number of folks who believe that real exchange rates don’t matter for trade in an era of global supply chains. In Taiwan’s case, the correlation between a weaker currency and a bigger current account surplus is clear.


“Taiwan is actually intervening in the market to hold its currency down” is the kind of wonky technocratic detail that seems somewhat out of favor right now.*

But it is also factually true that Taiwan has a bigger current account surplus and a more consistent pattern of intervention to resist appreciation over past few years than China does. Korea too, though Korea is a more complex story.** Which adds to the awkwardness of singling China out…if that is in fact what President-Elect Trump plans to do.

And, of course, this is all second order compared to the broader foreign policy issues involved in the “One China” policy.

* Taiwan’s bilateral surplus with the U.S. is modest. But it no doubt would be much bigger if calculated on a value-added basis. Depending on where the quantitative thresholds are set you could make a case that Taiwan would meet the 2015 Bennet amendment’s three criteria. Directionally at least.
** To be clear, Korea intervened heavily to block won appreciation in the third quarter, when the won was around 1100—but it hasn’t been buying recently. No need. The won has sold off with the dollar’s appreciation, with an assist from Korea’s own political uncertainty. It is no longer at levels where the Korean authorities typically intervene to limit appreciation. In fact, the won has depreciated to levels where the Koreans occasionally sell. The detailed data for October indicates very modest sales, after taking into account the fall in Korea’s forward book. November is likely to be similar.


  • Posted by David O'Rear

    13.7% current-account surplus in the first three quarters of 2016. Given the island’s political isolation, national debt is kept to a minimum and forex reserves ($450 billion) are considered a strategic asset.

    The foreign exchange reserves of the Republic of China amounted to US$434.35 billion at the end of November 2016, showing a decrease of US$915 million from the figure recorded at the end of the previous month.

    In November 2016, the EUR and other major currencies depreciated against the US dollar. The resulting decrease in foreign exchange reserves is greater than returns from foreign exchange reserves management.

  • Posted by Paine

    Often we fail to note very distinct forex rate ” moments ”

    The rate that produces “some how measured ”
    purchasing power parity

    The moment that balances funds flows

    And the moment that balances trade

    Each distinct moment deserves scrutiny

    China is still far from a forex that reflex any measure of purchasing power parity

    Job class Americans are correct to call for rectification of forex rates

  • Posted by Pane

    Too often we focus on consequences of a change in one flow
    Without stipulating the assumed changes in others


    Fiscal deficits if increased above recent expectations
    will impact forex rates kicking off bang on changes nearly everywhere

    But what is the assumed response of monetary and credit policy ?

    Nothing ..for example..after the Trump shock
    Precluded a higher fiscal deficit here in the states
    Combined with a more fully off setting
    Fed / Treasury set of actions in forex markets

    Yes we need far more fiscal thrust AND a lower imperial Dollar

    We can have both !
    If not
    Refute the conjecture

  • Posted by K. Olbert

    Once again, the CFR fails miserably to understand the point. How the CFR became an influential organization totally escapes me.

    The author states, “the case that China is managing its currency in ways that are adverse to U.S. trade interests is not strong.”

    On the contrary, the U.S. would be far better off if China wasn’t intervening to prevent depreciation. Their economy is chronically overheated.

    Let’s see what happens to the yuan & the Chinese economy when they stop intervening.

    The yuan is the only SDR currency that is allowed to be manipulated in such a way. This is unacceptable, regardless of whether geniuses such as this author think such manipulation is beneficial to the U.S. at this moment.

  • Posted by Brad Setser

    Paine — there used to be a free lunch. fiscal expansion at the zero bound with obvious labor market slack need not trigger a monetary response. there is still a free lunch in europe (and i would say in japan). with the US it isn’t clear. Fed certainly seems inclined to respond to fiscal stimulus with rate hikes.

    K Olbert — Can argue about many things, but China clearly hasn’t been overheating in an economic sense in the past few years. import growth = very slow, producer price deflation, cpi low, PBOC easing monetary policy (am thinking about policy relative to the “real” economy not the rate of lending growth). Letting China into the SDR was a mistake if letting them in is understood as “China needs to be like the other SDR currencies” immediately; China isn’t ready to have a fully open capital account or freely float. Letting China into the SDR is best understood as a recognition of China’s size and importance and thus its likely future position as a reserve currency. I obviously think a major depreciation of the CNY which raised China’s already large goods trade surplus would be a negative deflationary shock for the world, and thus something that we should want to avoid, if possible.

  • Posted by Paine

    Parity ?

    some measure of value added per hour needs to be unearthed
    For comparison

    Wage rates could be equalized in purchasing power
    But the split of value added between wages and capital income
    is probably too relevant and variable to by pass

  • Posted by Paine

    Free lunch expansions
    Are just sit on your hands mr central banker versions of
    Of the More general category
    Of credit card lunch expansions

    if credit is elastic enough there’s always more fiscal thrust in the system
    even with a policy pinned rate of interest
    Ie if base money is elastic enough

    Perhaps the real luxury is our sane tolerance for an acceleration of product prices under present global conditions

  • Posted by cas127

    Setser –

    This is a profoundly corrupt analysis that intentionally ignores (extremely recent) history – China did not accumulate its $1.5 *trillion* in Treasuries and $3 *trillion* plus in Forex because it *wasn’t* engaging in outright currency manipulation from 1995 to 2010 or so.

    Slipping in a “right now” (the manipulation case isn’t strong), buried deep in the article, does not somehow save your analytical integrity when the rest of the article affirmatively misleads by ignoring world historic events of the recent past and choosing biased metrics/denominators (GDP of local country – Gee, I wonder if China’s GDP isn’t hugely, hugely, hugely greater than Taiwan’s, resulting in a much, much, much higher *accumulation* of UST and forex via currency manipulation).

    This is a willingly/eagerly blind piece of “analysis”.

  • Posted by cas127

    “Follow the Money”

    But only during the time period we choose – and ignore that stack of UST and Forex in the warehouse(s) out back.

  • Posted by bsetser

    cas127 —

    hmmm. this is the first time i think i have ever been accused of ignoring China’s reserve accumulation from 2002 to 2012 (actually it continued in 2013 on quite a significant scale). A bit of my own intellectual history.

    I think I was among the first to point out that China’s true intervention and true reserves were much bigger than the data showed from 2006 to 2008, as China engaged in a lot of shadow intervention. See:

    Nouriel Roubini and I were among the first to strongly criticize China’s reserve accumulation and argue that a global system where Chinese reserve growth finance a US household deficit was profoundly unhealthy and unstable:

    I do though try to match my arguments to the latest data. Over the last four quarters of data, Taiwan’s current account surplus is $75b, China’s is $270b. So Taiwan’s surplus is about 1/4 of China’s which i would not characterize as small. The combined current account surplus of the “small” NIEs (Korea, Taiwan, Singapore and HK) is almost as big as China’s surplus ($250b) and their surplus has increased since the global crisis. Korea and Taiwan have both bought more fx in the market in the past two years than China (Korea also sold at times, to be clear, but it has consistently bought at the 1100 mark) so they are actively using their intervention in the fx market to maintain their surpluses; China has consistently sold reserves over the last two years. Korea and Taiwan also have weaker currencies — measured on the BIS real effective index — than they did in 07/08, while China’s currency has appreciated.

    I certainly hope I have been intellectually consistent over time; I do my best to identify those cases where fx intervention (purchases of reserves above what is needed for prudential reasons) are maintaining excessive current account surpluses. China did that from 02 to 13. It hasn’t done so in 14 or 15.

  • Posted by MoreFreedom

    So what if a nation manipulates its currency? The markets know what a currency is worth. And while many countries depreciate their currency to boost exports, that essentially makes citizens of those countries subsidize citizens in other countries who import their goods!

    The only beneficiaries in the country manipulating the currency, are the politicians and their rich friends exporting their products.

    If we’re going to advocate against national currency manipulation it ought to be because governments shouldn’t be favoring the rich and political class at the expense of taxpayers in those countries. As citizen of the USA, I say let them depreciate their currency, and let us import their goods when we need them (after all about 55% of imports into the US are used by manufacturers in making their products), take advantage of the situation, and hope their government stops hurting their citizens. Taking advantage of them is perhaps the best way to stop them from doing it.

  • Posted by David O'Rear

    Purchasing power parity … the comparison of similar baskets of goods between two economies, so as to arrive at what the exchange rate “should” be. Be sure to use highly similar economies for the comparison.

    But, the basket is supposed to be domestic, not trade-able. So, delete net foreign trade and international investment flows. Toss out government spending.

    And then, stick to comparing purchasing power, not total size of GDP.