Taiwan Dollar Beats Baht, Peso, Won as Ma Spurs China Trade

By Aaron Pan and Judy Chen

July 2 (Bloomberg) -- Taiwan's dollar climbed more than any Asian currency this year as improving relations with China bolstered investor confidence in the island's economy.

The currency climbed 6.8 percent against the U.S. dollar, beating the 6.5 percent gain in the Chinese yuan, as new President Ma Ying-jeou negotiated direct flights to China and allowed banks to invest in the world's most-populous nation. The Taiwan dollar will appreciate 1.2 percent and the yuan will strengthen 3.1 percent by year-end, according to the median forecast in a Bloomberg News survey of strategists.

``The Taiwan dollar and the yuan both have further upside and can continue to benefit from closer ties,'' said Norman Chan, chief executive officer of PCM Capital Ltd. in Hong Kong, which manages a fund of Asian hedge funds and recently bought Taiwanese assets. ``I expect further gains in Asian currencies especially if the yuan continues to rise.''

Taiwan's economy grew 6.1 percent in the first quarter from a year earlier as exports of electronics and chemicals to China helped the island weather a U.S. economic slowdown. Taiwan's currency reserves have almost doubled in the past five years to $290 billion and the trade surplus was $2.2 billion in May. The central banks on both sides of the 100-mile (161-kilometer) Taiwan Strait have allowed their currencies to appreciate to moderate inflation.

Diverging Fortunes

Asian currencies with smaller surpluses underperformed this year. The Thai baht dropped 11 percent, the most in Asia, as the current account turned into a deficit and protesters laid siege to Prime Minister Samak Sundaravej's residence.

The Philippine peso weakened 8.3 percent as record rice costs sent President Gloria Arroyo's popularity to the lowest since 2005. The South Korean won lost 10.6 percent as record oil prices widened its trade deficit and prompted a strike by truck drivers that brought ports to a near standstill.

``Dynamics are shifting to focus on political stability,'' said Leslie Phang, the Singapore-based head of investments at the private-clients unit of Schroders Plc, which oversees about $260 billion globally. ``The yuan is certainly still an outperformer and the Taiwan dollar has also benefited.''

Closer Ties

The Taiwan dollar posted its biggest first-half gain since 1989 as the government negotiated an agreement that will allow an average of 3,000 Chinese tourists a day to visit starting July 18. Direct transportation links between China and Taiwan were restricted since the end of a civil war in 1949 when the Communist Party defeated the Kuomintang.

The Taiwan dollar climbed 0.2 percent in June to NT$30.354, the second monthly gain and was little changed at NT$30.360 yesterday. Ma was elected in March, pledging closer ties with China. The currency will rise to NT$30 by the end of this year, according to the median estimate of 21 analysts in Bloomberg's survey.

The yuan, up 1.3 percent last month to 6.8543 per U.S. dollar, will strengthen to 6.65 by the end of the year, according to the median forecast of 25 economists. China's currency rose more than 20 percent since the peg to the dollar was scrapped in 2005.

``Both China and Taiwan will allow their currencies to rise to stem imported inflation,'' said Hideki Hayashi, chief economist in Tokyo at Shinko Securities Co., a unit of Japan's second-largest publicly traded bank.

Rising Interest Rates

The yuan will rise to 6.8 by the end of this year, he said.

Taiwan raised its benchmark interest rate to a seven-year high of 3.625 percent last week, after forecasting 3.29 percent inflation this year, the highest annual rate in 13 years. China's inflation quickened to 8.1 percent in the first five months from 4.8 percent for all of 2007.

Jim Rogers, the investor who in April 2006 correctly predicted oil would reach $100 a barrel and gold $1,000 an ounce, told an investor conference in Nanjing on June 28 not to ``give up'' on Chinese shares after the country's stock index fell almost 50 percent this year. Rogers told President Ma in a meeting on June 25 that he has been buying Taiwan stocks.

Taiwan's government says the June travel and tourism agreements with China may help boost economic growth to 5 percent this year from the 4.8 percent forecast in December. China expanded 10.6 percent in the first quarter.

Western Asset Management Co., part of Baltimore-based Legg Mason Inc., added to its bet on the yuan in June, expecting a 10 percent gain in the year ahead, said Rajeev De Mello who helps oversee about $600 billion as head of Asian bonds in Singapore.

``Now is a good time to get in,'' he said. ``Chinese reserves are still growing at an incredibly fast pace. It's adding about $50 billion a month, which is more than most countries have in total.''

To contact the reporters on this story: Aaron Pan in Hong Kong at apan8@bloomberg.net; Yumi Teso in Singapore at yteso@bloomberg.net.
Last Updated: July 1, 2008 13:27 EDT