Taiwan’s Central Bank Trying to Rein In Credit

Taiwan’s commercial banks recently engaged in a game of chicken with the Central Bank of China and lost. Now they are paying the consequences in the form of higher interest rates and tightened loan practices.

But the transition to doing business under a central bank determined to rein in credit and ease inflationary pressure will not be easy for either Taiwan’s banks or the customers they serve.

The three provincial government-run banks, which claim a 30% market share among commercial banks, finally buckled under central bank pressure in late April and raised interest rates on deposits and loans for the first time since the central bank raised reserve requirements April 1 as part of its anti-inflation campaign.

The Hua Nan, Chang Hwa and First Commercial Banks hiked their prime rates from 8% to 9% annually and deposit rates from 0.25% to 1.05%, pushing them as high as 7.60% for three-year time deposits.

The rate increases came on a day the banks had to square their previous 10 days’ required reserves with the central bank. Banks here must balance their daily required reserves with the central bank every 10th working day.

Still Short

Despite the concession, the banks still were short but the central bank refused to extend short-term loans to them. Instead, it slapped a 15% annual interest rate on their shortfall to punish them for lending activities that had expanded 70% in the first quarter from the same period last year, according to official figures.

It was the second time the banks have been punished by the central bank. In the first deadline round, April 12, the three banks were forced to pay the equivalent of $7.4 million in interest on their reserve shortfall.

“They kept extending loans and they didn’t raise rates because they were convinced the central bank wouldn’t penalize them, but then it did,” said Liu Hsou-hsiang, an associate researcher at the Chung Hwa Institute for Economic Research.

The central bank’s new hard-line stance is part of a wider monetary policy to curb inflation. Awash in cash, Taiwan watched its annual inflation rate soar to 5% in March from 1.2% in 1988.

Rate of 27%

Squeezing the money supply, which is growing at an annualized rate of 27%, will also help rein in rampant speculation on the local stock and real estate markets, two other inflation culprits, according to the bank.

Real estate in Taipei cost an average 70% more last year than in 1987 but rose as much as five times in some areas, increasing operational costs for businesses. A stock speculation craze that began last year has robbed industries of workers and raised labor costs.