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Carry trade prevails among Taiwanese businesses.

Taipei, April 23, 2012 (CENS) -- Taking advantage of the interest-rate differential between Taiwan and mainland China, many Taiwanese businessmen have borrowed U.S. dollar loans from Taiwanese banks and deposited them at mainland Chinese banks, a practice known as "carry trade."

Meanwhile, many listed firms have retained earnings from their mainland Chinese operations in mainland China and borrowed loans in Taiwan for dividend issuance, thereby earning interest differential, too.

A local banking manager reported yesterday (April 22) that the surge of U.S. dollar loans at offshore banking units of domestic banks, which are fund maneuvering center for many Taiwanese businesses, underscores the prevalence of carry trade. Statistics of Taiwan's central bank show that as of the end of February this year, outstanding U.S.-dollar loans at OBUs topped US$60.8 billion, up 40% over a year earlier and boosting the total assets of OBUs to US$154 billion, a record high.

Enterprises can borrow loans in Taiwan at interest rate of 1.5% per annum for depositing at mainland Chinese banks for interest rate of 5.5%, earning a differential of four percentage points.

Bankers noted that late last year, due to the European debt crisis, domestic interbank U.S.-dollar call loan rate, or TAIFX, jumped to a level 100 points (one point equals 0.01 of a percentage point) higher than LIBOR (London interbank offered rate), thereby dampening U.S.-dollar loans. TAIFX dropped in the first quarter, lowering cost for U.S.-dollar loans and leading to the surge of carry trade again.

Hsiao Tzu-ang, president of SinoPac Financial Holding, explained that carry trade in the global market usually refers to the borrowing of low-interest Japanese yen for re-depositing in higher-interest currency assets, such as Australian dollar, U.S. dollar, or euro.

The current wave of carry trade among Taiwanese enterprises is borrowing of U.S.-dollar loans at OBUs for re-depositing at mainland Chinese banks, either in U.S. dollar accounts or renminbi accounts, to earn the interest differential.

Enterprises can also lend the borrowed loans to their middle- or downstream enterprises, to earn even larger interest differential, which can reach seven or eight percentage points.

Tsai Yeou-chai, chairman of Mega Financial Holding, pointed out that many listed companies retain their earnings in mainland China and borrow low-interest loans in Taiwan for issuing dividends to shareholders.
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Author:Liu, Philip
Publication:The Taiwan Economic News
Geographic Code:9TAIW
Date:Apr 23, 2012
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