By Faith Hung
TAIPEI (Reuters) - Taiwan’s central bank, fearful of being labeled a currency manipulator by U.S. President Donald Trump, has pulled back on intervention to weaken the Taiwan dollar, making it Asia's second best-performing currency in 2017.
The currency has risen 5 percent so far this year, giving the island's stock market a boost, but knocking its fourth-quarter balance of payments to a five-year low and hammering its insurers, which are heavily invested overseas.
A central bank official told Reuters the currency movement was directly related to the bank not intervening so much in the foreign exchange markets.
"The central bank wants to signal to the United States that it does not manipulate Taiwan's currency," the official said.
The bank's governor, Perng Fai-nan, declined to comment when asked on Thursday if the currency's strength was linked to the bank's nervousness that Trump might label it a manipulator.
Trump has criticized especially China, Japan and Europe for policies he claims artificially weaken their currencies and make their exports more competitive.
His administration has said it will analyze the currency practices of major trading partners, and the U.S. Treasury is required to publish a report on these practices in mid-April.
After any declaration that a country manipulates its currency, the Treasury will try to negotiate a resolution, but the process could result in punitive tariffs on that country's goods.
Taiwan already meets two of the three U.S. criteria to be labeled a manipulator, including intervention to weaken the currency. An upcoming new iPhone model, for which Taiwan makes many of the components, is expected to boost its trade surplus with the United States to levels that could provoke a reaction.
"The effects of Trump's pronouncements that some central banks are manipulating their currencies have been quite toxic," said a vice-president at Mega Financial Holding’s banking arm, which is Taiwan's biggest state-run bank operating in overseas markets.
The effects have been particularly toxic for Taiwan's insurers, which have been hit with a T$14 billion ($455 million) loss on the foreign exchange risk reserves they hold to contain currency volatility.
Their currency reserves declined by a third in January to their lowest in at least a year and are set to plunge further. "The insurers must manage their forex risk ... We’re closely monitoring the impact,” said Thomas Chang, deputy director general of the insurance regulator. (For a graphic on Taiwan insurers' currency reserves click http://tmsnrt.rs/2mbkZTs)
For now, the insurers say they are hedging the risks and riding out the immediate storm.
“Insurance firms tend to invest in the long term, for 15-20 years. Short term volatility is unavoidable. Our team has adjusted accordingly,” said Lin Chao-ting, an executive vice president of privately owned Cathay Life Insurance, which has more than US$161 billion in assets.
Fubon Life Insurance was also sanguine, and expects the forex losses to wind down after March.
“A large percentage of life insurers’ overseas assets have been hedged. So industrywide, only 3-10 percent of asset positions will be impacted by volatility in the forex market,” the company said.
Cathay and Fubon are the insurance arms of Cathay Financial Holding and Fubon Financial Holding, respectively.
Investors say the concerns in Taipei are in part because they are unable to read Trump, an unorthodox new president with no prior political experience.
"Taiwan’s central bank is in a very difficult position,” said a president of a foreign fund management house in Taipei.
"People used to be able to predict what would happen if a country were named on the U.S. currency manipulation list. With Trump in office, it's a totally different story. You can't predict what the outcome could be," he said. "That's the scary part.”
The central bank in South Korea has also cut back on interventions that could weaken its currency.
China on the other hand has spent a trillion dollars since mid-2014 to stop capital outflows that have been dragging the yuan lower, but Trump's campaign rhetoric focused on its previous interventions to weaken the currency.
Meanwhile, the upward pressure on Taiwan's currency and the central bank's hands-off approach have attracted billions of dollars of foreign capital to the country's stocks.
After a week of volatility following Trump's election on Nov. 8, the country's main index has risen more than 8 percent. And Julianne Chu, a fund manager for Uni-President Securities Investment Trust, thinks it will keep rising.
"Foreign investors will continue to buy Taiwan stocks, which have been their favorite market in Asia since Trump took office,” she said.
“The focus of their buying will be iPhone 8 component makers," she said.
(Reporting by Faith Hung; Additional reporting by Loh Liang-sa; Editing by Vidya Ranganathan and Will Waterman)