An unflagging focus on stability, sometimes at the expense of reform, defined Perng Fai-nan’s two decades as head of Taiwan’s Central Bank.
In Perng Fai-nan’s two decades of service as Governor of the Central Bank of the Republic of China (Taiwan) before his retirement in February, the New Taiwan dollar’s value held steady, rarely deviating from a range of NT$29-$34 against the US dollar. Last year’s 8% appreciation was the highest in three decades.
Since the Taiwan economy is dependent on exports, “Taiwan’s exchange-rate policy is the most important aspect of its monetary policy,” says Liang Kuo-yuan, head of the Yuanta-Polaris Research Institute and one of Taiwan’s leading economists. Ensuring that the New Taiwan dollar doesn’t appreciate too much “creates a safety net for exporters,” whose competitiveness could be hurt by a strong currency.
The UK’s Central Banking notes on its website that Perng led the drive to reform Taiwan’s exchange rate system back when he was head of the Central Bank’s forex department, so that the spot rate would be determined by the market and fluctuate throughout the business day. Under the previous “center-rate” system, the rate was fixed throughout the day. Additionally, Perng oversaw the lifting of restrictions on bank-customer buying and selling of US dollars. Finally, he liberalized the forwards market, permitting individuals to freely buy or sell them and commercial banks to determine the forwards rate.
In theory, these reforms would allow market forces to determine the Taiwan dollar’s exchange rate. However, “Perng Fai-nan believes in stability above all else, so when market fluctuations were too strong, he would intervene,” says Wu Meng-tao, a vice president at the Taiwan Institute of Economic Research (TIER).
That focus on stability was the cornerstone of a 20-year tenure that saw Taiwan weather many a financial storm. Under Perng’s steady hand, the island emerged relatively unscathed from the 1997-98 Asian financial crisis; the 2000 dot-com crash; the SARS (severe acute respiratory syndrome) outbreak of 2002-03, which was followed by a property market crash; the 2008-09 global financial crisis; and the 2010 European debt crisis.
In February, Vice Premier Shih Jun-ji lauded the outgoing Central Bank chief’s record. During the aforementioned crises, the bank provided ample liquidity and stabilized the foreign exchange market, helping reduce the crises’ impact on Taiwan and speeding up economic recovery, Shih said in remarks published on the Ministry of Foreign Affairs’ Taiwan Today website.
Shih cited a number of strong economic indicators that are part of Perng’s legacy. He said that Taiwan’s gross domestic product per capital roughly doubled to US$24,331 during Perng’s tenure as Central Bank governor. Meanwhile, broad money supply (M2) increased 162% to NT$42.7 trillion (US$1.46 trillion) while inflation stayed low, with annual consumer prices rising just 0.89% on average.
Further, at the beginning of his first term as central banker in 1998 Perng suspended trading of non-deliverable forwards (NDFs), a foreign exchange hedging strategy in which parties agree to settle the profit or loss in a foreign-currency futures contract ahead of the contract’s expiration date. He made that decision following a period of volatility in the New Taiwan dollar’s value against the greenback. Perng told the UK’s Central Banking that suspending NDF trading helped stymie capital flight.
“He hates speculation in the market for the volatility it causes, and believed getting rid of NDFs would calm the market down,” TIER’s Wu says. While some observers said Perng was impeding financial liberalization, the central banker thought it was more important to keep the exchange rate and overall economy on an even keel, Wu adds.
History may have played a role in Perng’s concerns about market volatility, observes Thomas McGowan, an expert on financial-services law and foreign legal consultant in the Taipei law firm Russin & Vecchi. “We need to consider that collapse of the currency [due to hyperinflation] was linked to the fall of the [Republic of China] regime on the mainland,” he says. “Maintaining a stable currency is a way to prevent something like that from ever happening again.”
The other side of the coin
Perng was not only a steady hand in times of economic tumult, he stayed above the fray in a polarized political environment, serving under four Taiwanese presidents. “The Taiwanese people respect Perng for consistently acting in what they perceive as the nation’s interest, rather than that of a particular political party,” TIER’s Wu says.
Perng also received wide global acclaim for his work. Last month, the UK’s Central Banking Publications presented him with its Lifetime Achievement Award. In August 2017, Perng became the first person to be named among the world’s top central bankers for 14 consecutive years by New York-based Global Finance magazine.
Still, some observers point to drawbacks in Perng’s monetary policy. Yuanta Polaris’s Liang notes that whenever the New Taiwan dollar would begin appreciating too sharply against the greenback, exporters expected the Central Bank to intervene, usually by purchasing US dollars. Taiwan ended up amassing US$450 billion in forex reserves under Perng’s stewardship, the world’s fifth-largest forex war chest. Although that in itself may be positive, exporters’ dependency on Central-Bank intervention in the forex market is not.
Knowing that the Central Bank would help them keep prices down, Taiwanese exporters had less motivation to innovate. “If Perng had not so consistently intervened in the forex market, it would have created some pressure on Taiwan to upgrade its industries,” Liang says.
In turn, industrial transformation could have driven sustained wage increases. Instead, Taiwanese industry remains heavily dependent on contract manufacturing, just as it was at the beginning of Perng’s tenure. Median wages are also stagnant, hovering around the same levels as two decades ago. Meanwhile, Taiwanese consumers have been unable to enjoy the upside of sustained currency appreciation: a fall in the cost of imported goods.
Over the years, Perng has faced off against many vocal critics of his monetary policy. Most argue that he did not allow Taiwan’s currency to appreciate sufficiently. The Washington, DC-based Peterson Institute of International Economics agreed with those critics, estimating in 2016 that the New Taiwan dollar was undervalued by more than 25% against the currencies of Taipei’s major trading partners.
Taiwan Semiconductor Manufacturing Co. (TSMC) chief executive Morris Chang has suggested the opposite. A January 2014 report in The Diplomat notes that Chang has pushed for a policy of competitive depreciation, maintaining that the Taiwanese currency was overvalued.
Perng rebutted the analyses of both Chang and the Peterson Institute. “He’s really been like a strongman in the Taiwanese financial world,” Liang says. “He always has opposed other viewpoints and strongly defended his own views.”
Perng’s successor, Yang Chin-long, will certainly have big shoes to fill. The holder of a doctorate in economics from the UK’s University of Birmingham and the Central Bank’s deputy governor for a decade, Yang took over the role of governor in February. He has a reputation as a modest and courteous person who prefers to keep a low profile.
A February report in the Chinese-language CommonWealth Magazine suggests that Yang’s appointment signals the government’s satisfaction with the monetary policy of the past two decades. The government expects that Yang will pursue similar policies, the report says.
TIER’s Wu says that Yang might adopt a less rigid monetary policy than his predecessor. “He could be more flexible, communicating with others about monetary policy and considering their viewpoints.”
As an example, Wu points out that Perng strongly opposed creating a sovereign digital currency. In contrast, Yang has not been dismissive of the idea.
Says Yuanta-Polaris’s Liang: “We are going to have to wait and see to find out if Mr. Yang can play the game as well as Mr. Perng did.”