Brad Cesser is an advanced fellow of the Diplomatic Council and a former US Treasury official. Josh Young is a lecturer at Columbia Roaster and a former JP Morgan analyst.
Many countries invest a lot of money in the United States. It is not a star in NVIDIA and the US stock market. Most foreign investors purchase one of the many bonds provided by the United States.
Take Taiwan. I invested 1 ton of US bonds. 1 ton. Foreign exchange reserves (mainly bonds) and overseas bond securities have a total of $ 1.7TN.
This is more than 200 % of the national GDP and more than five times the total Taiwan bond market in Japan, almost all of the pimco bond funds. In fact, there are much less than the pure preserving of a much larger neighbor in Taiwan across the strait. In the mainland of China, there are foreign bonds with 2.9 tons of buried volume and foreign bonds, and foreign investment itself is a bond market.
In other words, Taiwan is almost a secretly underestimated force in the global bond market.
The world economy has many credits. A country that makes financial claims for foreigners rather than foreigners claims about them. In the balance of payment conditions, there are more external assets than external debt.
However, what may look like both financial and economic strength and the source can be completely obvious. In some large countries, the risk of financial stability may actually be reversed. The biggest danger is actually offshore, and above all, it lurks in the United States.
In today’s world economy, Taiwan is one of the best examples of this difficulty. Unfortunately, it is unlikely that the problem will stay in Taiwan.
How Taiwan became the king of the bond market
At the turn of Millennium, Taiwanese pure foreign assets were less than $ 200 billion. And of the total, almost three quarters were retained as an official foreign exchange reserve by the Central Bank.
The Taiwanese central bank was known as the Central Bank of China (Taipei), and wanted to maintain a lot of reserves, like the most emerging central banks of the time at the time. At that time, private investors were not very enthusiastic about investing in the United States. It was especially when the dollar was generally depreciated from 2003 to 2010.
But since then, the situation has changed dramatically.
In the early 2000s, Taiwan began to execute surplus of 5-7 % of GDP. It is big. At that time, it was really only WAR by China. After the global financial crisis, China’s surplus decreased, but the surplus of Taiwan has actually expanded. It has reached two digits in 2014, and since then it has been climbing generally.
The surplus of the current account generally means exporting more than imports, which leads to the accumulation of foreign currency, especially US dollars and international trade.
The problem was what to do with all the money.
Initially, the dollar was accumulated by the central bank to prepare for foreign exchange. It was not only typical, but wise (caution was extremely high, but most countries are about 20 % of GDP reserves.
However, the floods of Taiwanese foreign currency quickly became too large for the central bank. Taiwan has attracted excessive precautions and takes the risk of labeling as a currency manipulator by the US Treasury. In addition, if the reserved volume is too large, the central bank may complicate the financial management. Taiwan had an outlet.
Please participate in the Taiwan Life Insurance Industry.
Life insurance was always a large Taiwanese company. However, it was 60 % of GDP managed in 2006. It is almost inside the place where France, Germany, and Japan were at the time, similar to today’s United States. Furthermore, due to the lack of domestic bonds, it became a little difficult for Taiwanese insurance companies to grow much. Life insurance companies generally cannot maintain that much fairness.
However, after the change to the rules for managing the insurance portfolio, Taiwanese life insurance companies immediately issued local currency policy and immediately confirmed that they could invest in dollars overseas. As a result, the size exploded and now retains assets equivalent to about 140 % of Taiwanese annual economic production.
What was not revealed at that time was that the Taiwanese central bank was promoting this process. Life Insurance Company quietly replaced Taiwan dollars with central banks for the central bank’s foreign exchange reserve.
This was proved to be an effective pressure release valve. The Taiwanese central bank has begun to report the slowdown in spare growth, but Taiwanese dollars were not grateful for the mystery.
Even if the surplus of the current account continues to expand, it remains the truth, but as time passes, it is necessary to change the rule that will continue to grow to increase the distribution of portfolios to foreign bonds. It was.
At their peak, Taiwanese life insurance companies purchased more than $ 50 billion in US dollar assets a year. Of the 1.7TN foreign debt currently held by Taiwan, about 100 million dollars are on their private hand, especially in the insurance portfolio.
you know. 。 。
But this financial hand was sacrificed.
Taiwanese residents generally do not want a life insurance contract to pay US dollars. They want local currency. In other words, life insurance companies remain mainly in Taiwanese dollars, despite the fact that investment is increasingly US dollars.
At this point, the unevenness of the currency exposure is large, more than 40 % or about $ 460 billion in portfolio. It is only more than 60 % of Taiwan GDP.
As a result, the Taiwanese insurance industry has been exposed to three different risks in consideration of its enormous scale.
At first, it is obviously the currency mismatch itself. If US dollars are depreciated compared to Taiwan dollars, insurance companies may face significant losses because their assets are depreciated compared to liabilities.
The second is the cost of hedging part of its FX exposure. If US dollars are sold in the future, the insurance company can be isolated from the movement of the spot exchange rate, but these positions may be expensive to maintain.
Third is the performance of these foreign assets, especially the exposure to interest rates. As many people know too well, the rising rates rising rapidly can create a large bond portfolio a large market loss from a large market. It applies to SVB, etc., but Taiwan has a different scale of exposure to US interest rates, not local interest rates.
Spots -like hedge
Naturally, Taiwanese life insurance companies hedge, but only partially.
Approximately half of currency mismatch is hedged in foreign exchange derivatives. However, the remaining $ 200 billion foreign bonds, that is, about 25 % of Taiwan’s GDP, is exposed to the exchange rate in the United States. The big movement will immediately exhaust the insurance company’s capital (even if some losses can be reduced by the “proxy” hedge that depends on non -USD pairs).
The hedge itself is not free. Bulk occurs through foreign exchange derivatives, and insurance companies sell US dollars for future Taiwan dollars in the future. By constantly rolling these positions, insurance companies try to are isolated from the USD/TWD exchange rate movement.
But there is a cost. In the first approximation, hedging in FX Forward is exposed to the short -term interest difference between two currencies. That’s not a bad thing if all major central banks have fixed the policy rate near the zero lower limit. However, if the federal preparation system raised the price earlier than the Taiwan Central Bank, it was proved that the cost was considerable.
The points of the past hiking cycles were more than 5 % a year.
The decent part of these fangs -$ 140 billion four years ago, like $ 100 million, is now funded by the dollar owned by the Central Bank.
These swaps allowed Taiwan to hide the size of foreign exchange intervention, but we are now not there. Taiwan began to disclose the forward position in 2020, but no longer hold these swaps in the shadows. However, the bottom line of the insurance company is that the Taiwanese central bank is a very reliable source of hedging and a very reliable source.
Nevertheless, the $ 100 billion FX hedge is a so -called inconvenient forward (NDF) provided by other investors. The price and availability of NDFS are subject to the whim of the global market and can be very unstable. The hedges in these private markets are settled offshore (this is the meaning of NDFS).
This means that Taiwanese insurance companies cannot actually use them to procure local currencies when needed.
Rate risk
After that, there is an interest rate. Most of the foreign bonds owned by Taiwanese living organisms are complex instruments for a very long period of time. This created some interesting interconnection between the US and Taiwanese financial systems (details in the future Alphabil Post).
Taiwanese life insurance companies also mean losing funds from the market to the market every time the US fee rises. A lot of money.
Currently, most luxury corporate bonds dominated by most long -term US dollars are trading at a face value of 10 to 15 points. Applies to $ 700 million foreign bond portfolios. This is almost the same, almost the same loss, even though it is almost the same as the general capital of the Taiwanese insurance industry. For comparison, the peak of unreasonable losses that the US Bank suffered from investment securities in 2022 exceeded 30 % of Tier 1’s capital.
Certainly, these estimated values are a bit rough. The Taiwanese insurance company probably had a more secure bond. But they were probably some of the risky Asian corporate bonds (such as the dollar bonds issued by Chinese real estate developers). Developer). And actually selling specific bonds they own is actually very expensive and worsens the loss from the market to the market.
Local regulatory authorities certainly helped Taiwanese insurance companies. For example, they were allowed to shuffle many foreign bonds in a pending portfolio. There, the accounting value did not need to reflect the market value at the time.
But it has vulnerable to Taiwanese insurance companies against new shocks. Bonds holding in the bonds pending cannot be sold to crystallize losses, worsen things, and to help reduce losses in the event of a further impact.
There is no island in itself
The variations of this story are being deployed throughout Asia. The difference is simply one of the scale. The open position in Taiwan is much larger and unstable than the open position in Japan. And for complicated reasons (related to a closed financial account in Taiwan), it cannot be actually improved unless a life insurance company is allowed to rent a ton from the central bank.
In other words, the significant increase in the value of Taiwan dollar is a huge size of Taiwanese trade surplus, and the increase in the fact that it is still weaker than 30 years ago, is the huge financial financial financial financial financial financial. The insurance industry that may erase.
Obviously, the Taiwanese life insurance industry is betting on the Solvency (with the support of regulatory authorities) based on the assumption that Taiwanese central banks can avoid the meaningful evaluation of Taiwan dollars. 。
It feels like a dangerous bet. The US Treasury has always treated Taiwan somewhat generous, but there is no guarantee that this practice will continue. President Donald Trump has already been making a fuss about the size of the trade surplus with the United States in Taiwan.
When all Asia deals with extreme dollar strengths, it may seem strange to emphasize financial risk from the weakness of the dollar.
However, for many regions in the world that has not pushed money into dollar assets, the biggest risk of financial stability is actually a weakness in dollars, as it has become a major US creditor over the past 15 years. In particular, the weakness of the dollar is combined with the high price of the United States.
Of course, such shocks are also reverberated in the US market. After all, the world’s largest external debtors do not live in self -contained financial islands.
