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Investing.com The Central Bank of China (CBC) chose not to intervene significantly during Taiwan’s local currency, the New Taiwan Dollar (TWD), historic rally in early May.
The CBC Deputy Governor disclosed to lawmakers on May 21 that the bank allowed the TWD to appreciate to let market expectations for gains play out. This move diverges from the CBC’s previous interventionist tactics and suggests a potential shift in the monetary policy framework.
According to BofA strategists, the CBC’s hands-off approach during the TWD’s surge is seen as a strategic decision to avoid crossing the 2% of GDP threshold in foreign exchange purchases. This threshold is a key factor in the US Treasury’s criteria for designating a country as a currency manipulator.
The CBC’s strategy appears to be a response to increased scrutiny and demands for transparency in foreign exchange operations.
In 2025, the CBC’s foreign exchange interventions became more transparent due to a change in reporting practices established in 2020. Previously, the bank could limit currency appreciation through funding currency swaps with life insurers without disclosing positions in these derivatives.
Now, such data is published, reducing the CBC’s ability to manage the currency without triggering the US Treasury’s designation for persistent one-sided foreign exchange purchases.
The CBC’s reluctance to intervene has significant economic implications for Taiwan, an export-dependent economy where exchange rate fluctuations have a considerable impact. A 1% appreciation in the TWD typically decreases growth by 0.18 percentage points and inflation by 0.3 percentage points, based on CBC’s analysis from 1994 to 2024.
However, the technology sector’s resilience to currency appreciation and the effect of a stronger TWD in reducing energy import costs may mitigate these impacts.
Looking ahead to the latter part of 2025, if the TWD’s appreciation continues, the CBC is expected to consider easing monetary policy to counteract the tightening financial conditions.
Analysts predict that the CBC may lower interest rates in the fourth quarter of 2025 to support the economy, particularly as the technology and non-technology sectors in Taiwan are experiencing diverging growth trajectories.
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