Taiwan Vice Presidential Hopeful Calls for Sovereign Fund
(Bloomberg) -- One of the candidates for vice president in Taiwan’s upcoming election is on a collision course with the powerful central bank after calling for the monetary authority to allow some of its billions in foreign reserves to be used to set up a sovereign wealth fund.
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Cynthia Wu, the vice presidential candidate for the young Taiwan People’s Party, is vowing to lay the legal groundwork needed to establish a roughly $56 billion state-owned investment fund that would plow money into international equity funds, she told Bloomberg News in an interview Friday.
A sovereign wealth fund dedicated to driving higher returns and making bolder investment decisions could help improve financing for pensions, health-care and infrastructure, Wu said in an interview with Bloomberg Friday.
“If you invest in a Fortune 500 company fund or Europe ETF fund and just park that money there for 10 years, you’re still going to make more money than the central bank’s current 2% returns,” said Wu, who as a lawmaker has access to the central bank’s data.
“It’s a no-brainer,” she said. “It’s not very high risk at all.”
Wu said the fund would aim to deliver yields of around 7% to 8% annually. The central bank did not immediately respond to a request for comment on its returns.
A secondary benefit would be expanding Taiwan’s influence globally through the fund’s investments. “Taiwan needs more friends,” Wu added. The government in Taipei is officially recognized by just 13 nations after most switched to China in recent decades.
As one of the most high-profile advocates for a sovereign fund, Wu’s platform as a vice presidential candidate has thrust the decades-old debate into the spotlight of Taiwan’s election. While discussions over the pros and cons of a fund have surfaced from time to time in Taiwan, the main stumbling block has always been where the money to establish it would come from.
The central bank’s held some $565 billion in foreign reserves as of June, the fourth biggest hoard in the world, according to data compiled by Bloomberg. Wu and her party argue that the monetary authority and other existing state-run funds deliver limited investment returns that can easily be erased by inflation. She has suggested the sovereign fund be founded by using 10% of the central bank’s reserves.
Central bank governor Yang Chin-long has already said he will not give up any of the bank’s reserves for free but would be willing to loan them. Campaigners should figure out a different way to fund the idea rather than taking capital from the central bank, Yang told lawmakers in May, just after Wu put forward a proposal in the legislature.
A total of 64 out of 113 lawmakers signed onto the idea, an indication that it does holds some appeal on the island.
Financial Backstop
Yang’s reservations are based on concern over Taiwan’s access to emergency funds in times of crisis. Due to Taiwan’s diplomatic isolation, it does not have access to the traditional global lenders of last resort, such as the International Monetary Fund or the World Bank. Since the Asian Financial Crisis in 1997, Taiwan’s foreign reserves have expanded more than 570% partly in a bid to inoculate the economy from global shocks.
The central bank also uses its large cash pile to maintain a predictable exchange rate for Taiwan’s export-oriented manufacturers and insurance industry, buying and selling US dollars to avoid major fluctuations in the local currency.
Wu sought to alleviate the central bank’s concerns by saying the money would still belong to and be under the control of the monetary authority but just set aside and managed differently.
She also said a credit line swap with other central banks could help alleviate concerns about the island’s exclusion from international funding mechanisms.
Wu’s ability to push through a sovereign wealth fund will largely depend on the outcome of January’s presidential and legislative elections. The TPP campaign, headed by former Taipei City mayor Ko Wen-je, trails the other two main contenders in the race, according to a poll released Wednesday by My Formosa.
But the party may still be able to wield influence over key legislation if it wins enough seats in the lawmaking assembly.
--With assistance from Argin Chang.
(An earlier version of this story was amended to correct the number of lawmakers who support Wu’s proposal.)
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