Capital Outflow May Drain Funds From Stock Market

Taipei, Sept. 28, 2005 (CENS)--The persistence of negative interest rates and the languid securities market have induced a massive flow of capital out of Taiwan, which may lead to anemic funds in the local securities market.

In August, foreign investors in Taiwan recorded a net outward remittance, and outward remittances by native Taiwanese for overseas investments also expanded to NT$126 billion, according to statistics compiled by the Central Bank of China. As a result, the annual growth rate of the M1B, the aggregate money supply, slipped by 0.09 of a percentage point to 7.59%.

Also in August, the growth rate of M2, the broader measure of money supply, rose by 0.01 of a percentage point to 6.52%, due mainly to the conversion of the trust fund owned by the Taiwan Development and Trust Corporation to the category of banking deposits after the company sold its trust department. If the conversion of the trust fund were excluded, the M2 growth rate in August would have dropped to 6.46%, 1.13 percentage points lower than M1B (M2 plus quasi money). Market insiders worry that the growth rate of M1B may slide further, to a level below M2. This market scenario, dubbed "deadly crossing," often presages a market's further decline due to a lack of sufficient funds.

CBC officials note that the M2 growth rate averaged at 6.15% in the first eight months of the year, which still falls within the CBC's targeted range of 3.5-7.5%. In addition, despite the CBC's move to raise interest rates, the amount of money due to be repaid for outstanding loans and investments by private enterprises to financial institutions has risen to more than NT$15 trillion, a record high.

However, the persistence of negative interest rates (nominal interest rates that are lower than inflation) and the small interest-rate hikes so far in Taiwan have prompted many local investors to remit their capital abroad in pursuit of higher returns.

The CBC statistics show that in August, domestic life-insurance firms remitted NT$86 billion in funds for overseas investment, and individuals remitted NT$40 billion, for a total NT$126 billion, the highest levels in recent years. Shih Yien, director of the CBC's research department, pointed out that investment in overseas financial products by local people is a major reason for the decline in the M1B growth rate.