(Bloomberg) — Taiwan told foreign investors to exit bets on the local dollar, taken through exchange-traded funds, as a 12% gain in its currency threatens its economy and companies.
The strategy involves investors buying the island’s ETFs and inverse ETFs, allowing them to accumulate holdings of Taiwan dollars while maintaining a neutral position in the stock market. Foreign funds have been “repeatedly” deploying this playbook to speculate on the currency, according to Deputy Central Bank Governor Yen Tsung-ta.
A sign of the ballooning currency bets can be seen in how foreign holdings of Taiwan’s biggest inverse stock ETF had surged to 914.7 million shares, more than 90 times the amount at the start of the year, according to data from Taiwan’s stock exchange. An inverse ETF allows investors to profit from a decline in the market.
“As soon as we detect it, we immediately request that the funds be remitted out,” Yen said in response to lawmakers’ questions Wednesday.
Foreign investor activity around the ETFs came under the spotlight after the Taiwan dollar notched the biggest single-day gain since the 1980’s last month. The almost unprecedented rally is posing a risk to the island’s export-reliant economy and putting pressure on the life insurance industry, which has massive exposure to dollar assets.
Foreign holdings of a single inverse ETF must be kept under 30% to discourage overseas flows of cash into Taiwan that are intended to target the currency rather than investing in Taiwanese assets, according to an agreement between the central bank and the Financial Supervisory Commission from 2020.
There is also an official regulation in place that requires foreign inflows must be used for investment in domestic securities, and foreigners’ investments in fixed-income related products must be kept under 30% of their inflows.
To fend off speculations, the central bank can use so-called “window guidance” on onshore banks, but it lacks formal authority to directly restrict offshore investors from engaging in such trades.
“We are continuously monitoring the situation through our surveillance system,” said the deputy governor on Wednesday. The Taiwan dollar strengthened as much as 0.8% against the dollar on Thursday and leads gains among Asian currencies this year.
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