Analysing the growth of Taiwanese deposits in foreign currency

Ben Fung and Robert McCauley

BIS Quarterly Review, 2001

Abstract: Demand for bank accounts denominated in foreign currency often arises from the experience of very high inflation. For example, in Argentina, Russia and Turkey, dollar and Deutsche mark notes and deposits represent a significant share of the money stock because of a history of very high inflation. Likewise, generally low inflation in East Asia in recent decades has gone hand in hand with a typically modest share of foreign currency deposits in the region, with the average share no higher than in industrial economies (Table 1). Leaving aside the financial centres of Hong Kong and Singapore, foreign currency deposits bulk largest in Indonesia and the Philippines, where inflation has tended to be exceptionally high by regional standards. Even so, some recent developments in East Asia are at odds with this generally positive relationship between inflation and the scale of foreign currency deposits. One case is Taiwan, China (hereinafter referred to as Taiwan), where foreign currency deposits have shown very fast growth in recent years, notwithstanding low inflation.1 This special feature analyses the growth of Taiwanese deposits in foreign currency and considers several explanations for their surge, such as country risk, credit risk, interest rate differentials and exchange rate expectations.

Date: 2001
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