Foreign exchange reserves hit all-time high in June

July 8, 2004

Rising global interest rates are leading to an increase in profits from foreign exchange reserve investments. The Central Bank of China reports that Taiwan's foreign exchange reserves rose US$1.089 billion from May to June to an all-time high of US$230.092 billion, leaving Taiwan firmly in possession of the world's third largest forex reserves.

While in the past forex reserve yield rates have generally floated in the area of 5%, recent years have seen these rates fall to around 3% as central banks around the world repeatedly lowered interest rates. However, central banks are raising interest rates once again and yield rates are back up to the 5% to 6% level.

Taiwan's forex reserves grew US$23.46 billion from January to June. Bank executives, noting that the forex reserves increased by a record-high US$44.976 billion for the whole of 2003, maintain that the high growth in the first half of the year means there is the potential for another record annual growth rate in 2004.

However, a reduction in inward remittances by foreign investors has led to a slowing of the forex reserve growth rate over the last three months. This growth rate dropped to a twenty-month single-month low of US$1.089 billion in June. This highlights how growth of the forex reserves is dependent not simply on interest rate fluctuations, but also on the inward and outward remittances of foreign investors.

June's forex growth was primarily the result of profits from interest. In general, monthly interest profits from the forex reserves range from US$800 million to US$1 billion. This works out to yield rates of 5% to 6% on forex investments.

The CBC points out that, despite its focus on stability over profits when in investing the nation's forex reserves, its forex profits have outperformed the world's leading global bond indices.

US dollar assets make up the largest portion of Taiwan's forex reserves, while Euro holdings account for the next largest share. These reserves are chiefly invested in government bonds and savings accounts with high credit ratings, while a certain portion is also deposited in accounts at the overseas branches of domestic banks.

Forex analysts say that the Central Bank for the most part invests Taiwan's forex reserves in fixed gain commodities. While rising interest rates will not affect reserves already invested in these commodities, newly invested reserves will gradually begin to reap profits from the increases in interest rates. With interest rates on the rise worldwide, forex profits are almost certain to continue rolling in.

Asia is home to the world's top forex holders. Japan, with reserves of US$797.1 billion as of the end of May, continues to maintain the world's largest foreign exchange reserves. China's May total of US$458.5 billion leaves it in control of the second largest reserves. South Korea, Hongkong and Singapore report reserves of US$165.7 billion, US$120.1 billion and US$99.5 billion respectively. (Economic Daily News)

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