Commentary
The Taiwan dollar is rapidly emerging as Asia’s top funding currency, surpassing the yuan due to its stability, lower volatility, and appeal for carry trades amid the aggressive currency interventions by the Chinese Communist Party (CCP).
The Taiwan dollar is rapidly emerging as Asia’s leading
carry-trade currency, overtaking the Chinese yuan because of its increased stability and reduced risk of interest rate and currency fluctuations. In carry trades, investors borrow at low interest rates in one currency to fund investments in higher-yielding assets elsewhere, and analysts suggest the Taiwan dollar’s superior liquidity and lower borrowing costs are making it the preferred choice. Over the past month, the Taiwan dollar has delivered the second-highest risk-adjusted returns among Asian currencies, according to the Sharpe ratio, reflecting its growing appeal to investors.
The shift from the yuan to the Taiwan dollar reflects declining confidence in the Chinese currency. This is driven by China’s slowing economic growth, increased state intervention, and geopolitical tensions, which are expected to worsen during a second Trump administration. In contrast, Taiwan’s stable governance,
robust economic performance, and integration into global markets enhance the Taiwan dollar’s appeal as an investment and funding currency.
A key factor driving preference for the Taiwan dollar lies in the stark contrast between the monetary policies of the two central banks. Unlike the yuan, which is heavily influenced by Beijing’s political and economic strategies, the Taiwan dollar operates under a hands-off central bank approach, allowing its value to be determined by open-market forces. This policy, supported by Taiwan’s export-driven economy and capital flows—particularly from artificial intelligence-driven investments in its stock market—creates a stable borrowing environment. The minimal central bank intervention ensures low volatility in both
interest rates and currency value, further enhancing the Taiwan dollar’s appeal.
In contrast, China’s central bank, the People’s Bank of China (PBOC), actively intervenes to support the yuan. It sets artificially high
exchange rates, restricts money flow, and issues yuan-based financial products in overseas markets. These measures are designed to prevent the currency from losing too much value, especially during times of global tension or trade disputes, like those that could arise under another Donald Trump presidency.
However, this system—where the PBOC tightly controls currency values and borrowing conditions—often creates instability. It can lead to sudden spikes in borrowing costs, making financial planning harder and increasing risks for investors.
For instance, on Jan. 15, overnight borrowing costs for Chinese banks
surged to 16 percent because of a cash shortage ahead of the Lunar New Year. Even though the PBOC injected 959.5 billion yuan ($132.5 billion) into the system, its overall cautious approach resulted in less money circulating than needed, pushing short-term borrowing rates to their highest level since October 2023. Episodes like this have made the yuan one of Asia’s most volatile currencies in recent months.
On Jan. 10, the PBOC halted its treasury bond purchases, causing significant ripples in the financial market. Central banks typically buy bonds to inject liquidity and keep borrowing costs stable, but stopping these purchases reduces demand, driving bond prices down and yields (interest rates) up. With 10-year bond returns at just 1.6 percent, far below higher short-term borrowing costs, bonds became less appealing to investors. This reduction in liquidity raised interest rates, making borrowing more expensive and creating challenges for banks, businesses, and local governments to access affordable credit.
These events underscore how the CCP’s interventionist monetary policies often backfire, eroding investor confidence in government bonds. In contrast, the Taiwan dollar’s market-driven system offers stability, making it a preferred choice for carry trades that rely on low volatility and consistent borrowing conditions. With other Asian currencies
facing challenges like
rising interest rates or higher volatility, the Taiwan dollar stands out as a reliable and cost-effective funding currency, reflecting Taiwan’s economic resilience and sound financial system.
This shift underscores broader changes in regional finance. The Taiwan dollar is gaining prominence as the yuan’s dominance wanes under the CCP’s interventionist policies and evolving global trade dynamics. Rising U.S.–China tensions and decoupling efforts further accelerate this trend, as investors increasingly favor the stability and predictability of the Taiwan dollar over the yuan.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.