Perng calls for Asian exchange-rate coordination mechanism

Perng made the call in an article in the September issue of The Banker, a London-based magazine.

He said there is no question that capital mobility can bring benefits, though in a number of countries international capital flows have been closely linked to financial crises.

Perng said that if exchange rates are stable, lower transaction costs and reduced uncertainty will boost growth in intra-regional trade and investment.

He suggested that the Chiang Mai Initiative Multilateralisation (CMIM), a currency swap arrangement between 13 Asian countries that came into effect on March 24, should evolve into a comprehensive swap mechanism across Asia with a credible regional institution at the center to serve as the primary intermediary.

International capital movements in the form of foreign direct investment help both the recipient country and the investing country, he said. Short-term capital, however, “is highly volatile and large and sudden inflows of foreign capital lead to exchange rate overshooting, loss of trade competitiveness, domestic credit booms and asset price bubbles, all of which can elevate systemic risks and create financial fragility.”

An economy cannot simultaneously pursue monetary independence, exchange-rate stability and capital mobility, so each country must strike a balance that will ultimately promote financial stability and foster long-term economic development, he said.

Faced with a surge in capital inflows, prudential regulations that target specific segments of the economy can play a useful role in dampening the demand for speculative capital, as with Hong Kong, Singapore, South Korea and Taiwan, Perng said.

“For many countries, choosing the right exchange-rate regime and maintaining an appropriate level of foreign exchange reserves may not suffice,” he said.

In the face of substantial inflows, macro and prudential policies should be complemented by some form of capital management, Perng said.

He said that as a small and highly open economy, Taiwan realizes that unfettered financial liberalization and unbridled international capital flows can put financial stability at risk. To prevent the local foreign exchange market from being disrupted by international capital flows, his bank introduced a number of measures to manage foreign capital inflows, and they have proven to be “largely effective,” he added.

Regional cooperation has a useful role to play in managing international capital flows as foreign investors are prone to herd behavior, and financial crises are often triggered by capital flows linked to the contagion effect.

Perng said the international community should work together to put measures in place to manage international capital flows more effectively so that each country can pursue policy and reform to maintain financial stability and promote sustainable economic growth.

Perng, who has served as governor since February 1998, has been rated several times by Global Finance magazine as one of the best central bank governors in the world.

Subscribe to The China Post and save 25%. Click here

SharePrintEmail

Write a Comment

Terms

Enter your comments - 3000 characters max

Type in image code

Submit

 Receive China Post promos
 Respond to this email