Governments favor sovereign wealth funds as vehicles that can put cash to good use, whether for fiscal stabilization, inter-generational savings and strategic economic development – but Taiwan’s central bank has lodged its objection to Taipei’s plans for a fund that could utilize foreign exchange reserves.
Legislators had passed a law to give the bank the power to use its forex to run an SWF. However, the territory’s central bank cautioned that tying up forex in illiquid assets could undermine its ability to meet hard currency needs and maintain the stability of the forex market.
Taiwan’s forex reserves are estimated at US$555 billion, representing 116% of exports and 73% of GDP. It is the world’s fourth largest holder of forex reserves, after China, Switzerland and Japan. Lawmakers such as Taiwan People’s Party Legislator Cynthia Wu are dissatisfied with the 2.7% average return on investment on its portfolio, which is 96% comprised of foreign government bonds and deposits, and want 10% of reserves invested in potentially higher yielding assets.
Liquidity concerns have made the central bank highly conservative in its approach to forex management. It is not a member of the IMF, which has in the past delivered lifelines to countries facing solvency problems such as South Korea. At the same time, Taiwan’s sovereign status puts it in a geopolitically sensitive position that could require defensive moves to support the Taiwanese dollar. Nevertheless, the central bank makes stable contributions annually, averaging nearly 9% of total – higher than Singapore’s 6%, South Korea’s 1.1% and Japan’s 0.7%, according to governor Yang Chin-long.
Legislators pointed out that the central bank missed an opportunity to improve returns by increasing its allocation to gold. However, in the bank’s defense, Yang said it already has a higher allocation than its regional neighbors at 4.8% of reserves – above those of China, Japan, Singapore and South Korea – and its gold holdings have generated an average annual return of 4.7% from 1989.
Taiwan already possesses a range of state-owned investors, including public pension funds and state-owned companies. The Ministry of Labor’s pension and insurance funds have a combined AUM of more than US$200 billion, led by the Bureau of Labor Funds (BLF), while the Executive Yuan operates pension funds with AUM of more than US$20 billion.
The National Development Fund (NDF) is the closest Taiwan has to a SWF supports industry innovation, research, and development in Taiwan, with direct investment into firms, indirect investment via venture capital funds, and loan financing.
In August 2017, the NDF established Taiwania Capital, a VC investment company that now operates six funds with total AUM of US$665 million, focusing on tech startups. In March 2022, Taiwania also established a US$200 million venture capital fund for deep teach start-up funding in central and eastern Europe, and building connections with Taiwan’s industry and research base. It aims to invest in 20-25 companies aiming at the Czech Republic, Slovakia and Lithuania where venture capital in series A and B rounds is scarce. In addition, the NDF oversees a NT$100 billion (US$3.2 billion) Industrial Innovation and Transformation Fund that aims “to stimulate private sector investments, promote innovation and transformation, create job opportunities, and reinvigorate Taiwan’s economy.”
The NDF’s holdings would be eclipsed by any active SWF seeded with 10% of the territory’s forex reserves (amounting to around US$56 billion), yet unlike the central bank it has the capacity and skills to engage in wealth creation – a factor that Governor Yang is keen to stress in his opposition to central bank oversight of an SWF.
Rather than drag the central bank into sovereign wealth management, Taiwan might want to transition the NDF – or Taiwania – into a fully fledged SWF, with or without the use of forex reserves.