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September 21, 2017

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Central bank again calls for currency swap with mainland

TAIPEI, Taiwan -- Recognizing Chinese renminbi as a viable reserve currency, the Central Bank of the Republic of China (Taiwan) on Wednesday explained why it has included renminbi in Taiwan's foreign exchange reserves while reiterating its wish to ink a Taiwan-China currency swap agreement.

While briefing the Finance Committee of the Legislative Yuan, a central bank official listed those reasons why it has started incorporating renminbi (RMB), also called Chinese yuan, in the bank's forex reserves.

The central bank said that mainland China is now the second largest economy, behind only the United States. The bank cited an Economist report that said China's gross domestic product is expected to pull ahead of the United States in 2019.

The United Nations' International Comparison Program, conducted with the World Bank, recently found that China's purchasing power parity was 20-percent higher than earlier thought and concluded that China is expected to overtake the U.S. this year as the world's largest economy in terms of purchasing power.

Meanwhile, at least 40 central banks around the globe have invested in renminbi and several more are preparing to do so. The trend is occurring across both emerging markets and developed nations' central banks, which desire to diversify into other currencies.

The central bank also recognizes renminbi as a viable reserve currency, attributing this fact to a sound balance of payment and much lower government debt as a percentage of GDP, compared to the U.S. and the European Union.

The central bank has started holding renminbi in its forex reserves portfolio since October of 2013. Central bank Governor Perng Fai-nan (彭淮南) said there is a realistic need to do so as trade and financial ties on both sides of the strait have risen substantially since 2012 after a renminbi-clearing settlement deal was signed. Mainland China's trade with Taiwan has reached US$160 billion and China is Taiwan's biggest export market.

Additionally, mainland China is marching full steam ahead on renminbi internationalization, another reason the central bank official cited to explain why it is increasing the share of RMB in the bank's forex reserve portfolio.

The central bank, however, did not give details on the size of Taiwan's renminbi holdings. The bank again expressed hope that the agreement can be signed as soon as possible, adding that the framework is already in place.

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