T.Aiwan’s life Insurance companies and Government Pension Investment Fund (GPIF) sound like sleepy organizations — hardly playing a role in the international marketplace. They now manage as much foreign assets as the country’s foreign exchange reserves (see chart). By the middle of this year gpif It alone held more than $700 billion in foreign bonds and stocks.
As the dollar rises, policymakers are looking voraciously at these foreign assets. The US dollar will rise by 16% in 2022 against a basket of currencies. Outside the United States, currency depreciation has increased import costs. Japan and South Korea have followed the traditional path of selling their foreign exchange reserves to strengthen their currencies. Japanese officials have not specified when, but the sudden appreciation of the yen on Oct. 21 showed clear signs of intervention. Analysts estimate that 5.5 trillion yen ($37 billion) was spent on such operations this month.
Will domestic financial institutions also participate? China will not hesitate to do so. The People’s Bank of China fine-tunes foreign exchange reserve requirements for commercial banks to manage the yuan, and majority state-owned financial institutions sometimes intervene on behalf of the central bank. Things are not so easy in countries with more open capital accounts and less oppressive governments.
In the early 2000s, when the dollar was as strong as it was last time, the question of intervention by financial institutions did not arise simply because funds were much smaller. As recently as 2010, South Korea’s pension funds were a third of their current size. Since then, people have aged and demanded higher returns, and portfolios have ballooned. The until recently welcomed yen, won and Taiwan dollar continue to fall as companies sell off their local currency to buy foreign assets.
Civil servants have varying levels of influence over agencies. The Bank of Korea and South Korea’s pension fund signed a $10 billion currency swap agreement last month. Alleviating a potential source of pressure on its market value.
Life insurance companies in Taiwan are private companies, unlike pension funds in South Korea. Still, they can push in the right direction. Taiwan’s central bank has now allowed life insurance companies to transfer between $100 million and $150 million to Taiwan in a single day, according to Reuters. When local currencies were strong, central banks were reluctant to allow such transfers.
Japanese gpif It wasn’t adopted to combat the depreciation of the yen, but speculation continues that it might eventually. Brad Setser of the Council on Foreign Relations, a think tank, said the fund could hedge more assets with the yen, which could have a strengthening effect on the currency. “For pure financial management reasons, gpif We should have a large share of foreign currency holdings held unhedged,” he added.
The dollar has fallen slightly in recent days, but the situation remains the same for Asian officials. They will likely continue to intervene. You may also want to leverage external assets. ■
Sign up for expert analysis of the biggest news in economics, finance and markets. money talka weekly subscriber-only newsletter.
https://www.economist.com/finance-and-economics/2022/10/27/asias-vast-financial-institutions-are-being-enlisted-to-defend-currencies Asian financial giants are joining to protect their currencies