The Economist prescribed wrong cure for Taiwan's undervalued currency say experts

In a recent article headlined "The Hidden Risks in Taiwan’s Boom," The Economist outlined perceived risks behind Taiwan’s economic prosperity.

Citing its GDP-adjusted Big Mac Index, The Economist described Taiwan's New Taiwan dollar (NT$) as the most undervalued currency in the world. 

The Big Mac Index is an informal measure of purchasing power parity, comparing the price of a McDonald’s Big Mac across countries to assess whether currencies are over- or undervalued.

The piece argued that Taiwan’s long-suppressed exchange rate has produced a large current-account surplus, at the cost of reduced consumer purchasing power, inflated housing prices, and financial risks, particularly in the life insurance sector.

The Economist wrote that a continued depreciation of the US dollar could threaten the stability and solvency of Taiwan’s life insurance companies. US trade hawks also pressure Taiwan to appreciate its currency at any time, the article warned.

The article concluded that “The key is for the CBC to establish a long-term path for the currency, as Singapore does. China, too.”

Following the article's publication, the Central Bank of the Republic of China (Taiwan) (CBC) issued a five-point statement on November 14, responding to The Economist’s arguments. 

The CBC stated that since Taiwan’s financial liberalization, cross-border capital flows have been the main factor influencing the appreciation or depreciation of the New Taiwan Dollar (NT$). 

It added that The Economist has previously acknowledged that the Big Mac Index is not suitable for evaluating whether a currency is overvalued or undervalued and should not be used to infer the fair value of Taiwan's currency. 

Therefore, the article’s claims about negative economic and financial effects caused by an undervalued NT dollar do not hold, the bank argued. The CBC also noted that the US Treasury has never requested Taiwan to appreciate its currency. 

Currency manipulator?

In its foreign exchange report released this past June, the US Department of the Treasury placed Taiwan on its currency manipulation “Monitoring List” of economies whose currency practices and macroeconomic policies warrant close attention. With the Treasury’s next semi-annual report approaching, Taiwan remains at risk of staying on the list based on US review criteria, specifically, a trade surplus with the US exceeding US$15 billion and a current account surplus surpassing 3% of GDP.

On Nov. 14, the CBC issued a press release announcing a consensus with the US Treasury regarding exchange rate issues. The statement said "both sides confirmed that they will avoid manipulating exchange rates or the international monetary system to prevent effective balance of payments adjustment or to gain an unfair competitive advantage."

This announcement has drawn attention across Taiwan's financial markets, sparking speculation regarding the potential appreciation of the NT$ and raising questions about whether a Taiwanese version of the Plaza Accord may be on the horizon.

The Plaza Accord was a 1985 agreement among the US, Japan, West Germany, France, and the UK to devalue the US dollar relative to other major currencies to address trade imbalances.



Right diagnosis, wrong prescription

Lin Chu-chia (林祖嘉), professor of economics at Taiwan's National Chengchi University and former minister of the National Development Council, told TCN that while most of the issues raised by The Economist are accurate, its policy recommendation for Taiwan to strengthen its currency is debatable and difficult to implement.

From a historical standpoint, Professor Lin said that when the US pressured Japan into sharply appreciating the yen in the 1980s, Japan’s economy entered decades of stagnation.

If Taiwan were pushed into a similar situation, the country could face thirty to forty years of economic stagnation as well, he said.

If it ain't broke, don't fix it

Sega Cheng (程世嘉), co-founder and CEO of Taiwanese data technology company iKala and chair of the Taiwan Internet and E-commerce Association, pointed out in a Facebook post that Taiwan’s predicament is a deeply systemic problem. He calls the predicament a “multi-policy trap” that Taiwan created for itself. 

Cheng said the full picture is a tangled and mutually reinforcing structure involving currency policy, fiscal policy, the tax system, and industrial policy.

He stated that the CBC is no longer a free decision-maker because it has been held hostage by the need to maintain financial system stability. The entire country is constrained by a fiscal and tax structure that is presented as supporting hardware exports, but in practice, it subsidizes living costs and encourages asset accumulation.

This situation, Cheng explained, forces the central bank to continue sacrificing domestic purchasing power and inflating asset prices to preserve a superficial sense of stability. 

Cheng wrote, "Taiwan today is a place of extreme and delicate balance. Exchange rates are only part of the cause, and only part of the effect. Decades of policy bias over the past 50 years have already intertwined all causes and effects. The Economist tries to unravel this situation, but ultimately only sees a portion of the complex, interdependent structure."

Using an analogy common among software engineers, Cheng added, “If it works, don’t touch it.”

Applied to Taiwan, he said, the saying fits perfectly. No matter who is in charge, the situation remains the same. All anyone can do is make small adjustments at the margins to keep the system from blowing up in their own hands, he concluded.

Taiwan should pay more attention to “Dutch Disease”

Professor Lin pointed out that Taiwan should be more alert to the risk of “Dutch disease,” a potential economic crisis that arises when resources become overly concentrated in a single industry.

Lin noted that in recent years, Taiwan’s electronics sector has been highly competitive and has become the country’s main export driver. 

However, he said, outside the electronics industry, many traditional sectors such as steel, auto parts, and textiles now face serious export challenges and operate with very thin profit margins.

If Taiwan's NT$ were to appreciate rapidly, TSMC might survive, but traditional industries with low export margins could be wiped out entirely. This, he emphasized, would be a major problem.

Professor Lin noted that in Taiwan’s manufacturing workforce, electronics account for less than one-third of employment, while the rest is concentrated in traditional industries. If these industries were to collapse, it would be politically unacceptable to the public.

He said that the government should find ways to support these sectors, such as helping Taiwan join regional trade blocs like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) or the Regional Comprehensive Economic Partnership (RCEP) to expand markets and enhance competitiveness. 

Lin stated that these industries already face shrinking markets, and if the exchange rate rises further and causes mass unemployment, the consequences would be unacceptable; Taiwan must also diversify its economic development, he added.



The problem is a lack of risk diversification

He pointed out that Taiwan’s life insurance companies should diversify their overseas asset portfolios by holding a basket of currencies rather than only US dollars. Other currencies, or even gold, should be considered to spread risk and lower systemic vulnerabilities, he added.

Taiwan has already taken some steps in this direction. According to Taiwan's Financial Supervisory Commission, as of September 2025, the foreign exchange volatility reserve of the life insurance industry reached NT$341.9 billion (about US$11 billion), an increase of NT$122.3 billion compared with the end of 2024.

Tax policy is the key

The Economist article argued that a cheap currency has pushed up housing prices. It noted that printing NT$ to buy foreign exchange has flooded the financial system with liquidity and driven down interest rates.

According to the latest statistics from Taiwan's Ministry of the Interior, the average mortgage burden ratio in the country is 44.53 percent, and the house price-to-income ratio is 10.24. 

In Taipei City, the mortgage burden ratio reaches 69.94 percent, and the house price-to-income ratio is 15.85, the highest in the country.

The house price-to-income ratio is an indicator used to assess housing affordability. It shows how many years a household would need to save its entire income, without spending anything, to purchase a median-priced home in that area.

Seoul, like Taipei, is highly developed, densely populated, and has limited land, yet its house price-to-income ratio is only about 14. According to research by the US private firm Construction Coverage, the highest ratio among US cities is Los Angeles at 12.2.

Professor Lin said that although interest rates are indeed pushing up housing prices, they are not the decisive factor. Compared with Taiwan, Japan’s interest rates are even lower, yet its housing prices have not surged in the same way, he added.

The key reason for Taiwan’s housing boom, Professor Lin argued, is that property tax rates are too low. The low holding costs on real estate encourage speculative behavior in which people buy houses and land and simply wait for prices to rise, Lin added.

Cheng expressed a similar view. The imbalance in property prices, he said, stems from fundamental flaws in the tax system. Specifically, Taiwan has extremely low holding costs on real estate, such as ineffective vacancy taxes and land value taxes, he added.



Problem not mentioned

Professor Lin added that slow wage growth in Taiwan is also a serious problem.

He said that “since 2000, Taiwan’s economic growth rate has generally stayed around 3 to 4 percent, but wage growth has only been around 1 to 2 percent. In other words, wages have grown more slowly than GDP.”

Taiwan's distribution of GDP has shifted over time. 

Professor Lin noted that around the year 2000, capital income accounted for about 45 percent of GDP and labor income about 55 percent, but today, capital income has risen to about 52 percent, while labor income has fallen to about 48 percent.

According to the latest wage statistics released by Taiwan's Directorate-General of Budget, Accounting and Statistics in September 2025, the median regular wage for full-time Taiwanese employees in the industrial and service sectors is NT$40,018. This means that half of Taiwan’s wage earners receive a fixed monthly salary below roughly 1,280 US dollars. 

Professor Lin said the government should find ways to raise workers’ wages. He acknowledged that the government cannot simply force companies to increase pay.

The best approach, he suggested, is for the government to take the lead by raising the salaries of soldiers, civil servants, and teachers, because in recent years their average pay has grown more slowly than that of private-sector workers.

If the government does not lead by example, companies will be even less willing to raise wages, he said.

Although The Economist identified some real problems, the word on the street in Taiwan is that it did not recognize the systemic challenges Taiwan faces on the ground. If policymakers try to solve everything solely by pushing for currency appreciation, they may, as the experts above warned, end up prescribing the wrong cure.