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The Central Bank of the Republic of China (Taiwan) is expected to leave its policy rate unchanged at 1.375 percent on Thursday afternoon given the island’s benign inflation outlook and hovering external uncertainties, according to the latest research report from Scotiabank.
As foreign bond ETF investments are exempted from transaction tax during 2017-2026 and hedging requirements, their outstanding notional increased substantially to TWD512.1 billion as at end-February 2019 from TWD374.7 billion at end-December 2018 and TWD76.3 billion at end-February 2018.
In the meantime, Taiwanese lifers ramped up their allocations to foreign bond ETFs to TWD 501.3 billion as of February 2019 or 97.9 percent of the total, according to the FSC’s statistics.
The rules allow lifers to allocate up to 10 percent of their total capital of TWD24 trillion (i.e. TWD 2.4tn) in ETF products. The FSC’s Insurance Bureau data showed lifers purchased a total of TWD 449.4 billion worth of foreign bond ETFs as at end-January, accounting for 1.85 percent of their total capital.
It suggests there is still room for Taiwanese lifers to buy more foreign bond ETFs. FSC Chairman Wellington Koo said last Thursday that he would not forbid insurers from purchasing such products as the practice does not breach any regulations, the report added.
Meanwhile, Chairman Koo added the commission would monitor such transactions and amend regulations by June to reduce risk. The commission might increase the risk weighting of ETFs from the current 8.1 percent that means lifers would need to hold more capital to improve their risk profiles, or setting a new minimum equity-to-asset ratio.
Demand for selling USD/TWD NDF will likely resume if the regulators tighten the relevant rules. The TWSE share index has been recovering and rallied through the 10,500 resistance level in line with rising S&P500 index since January, with foreign investors buying a net USD3.60 billion of local shares year-to-date. Renewed equity inflows are supportive of the TWD, Scotiabank added in its report.
