The surge of the New Taiwan Dollar raises concerns about exports, and Taiwan Semiconductor will inject $10 billion into its overseas subsidiaries, marking the largest scale in history

The world's largest foundry, Taiwan Semiconductor Manufacturing Company (TSMC), will inject $10 billion into its overseas subsidiaries, marking the company's largest capital operation to hedge against exchange rate risks. This move aims to reduce foreign exchange hedging costs and enhance the capital flexibility of exchange rate risk management.

On June 25, it was reported that TSMC's wholly-owned subsidiary TSMC Global Ltd. approved a plan to issue new shares worth $10 billion to its parent company to increase capital, helping to lower its foreign exchange hedging costs.

Philip McNicholas, a sovereign strategist at Robeco Asia in Singapore, stated:

Increased foreign exchange volatility typically means banks may adjust margin requirements. Issuing new shares and immediately injecting cash helps the company manage margin requirements for existing and new hedging positions. Cash in USD is also useful for the company's overseas operations, which require ongoing hedging.

The recent strengthening of the New Taiwan Dollar has raised concerns in the market about the export-oriented economy of Taiwan. As a major chip supplier to Apple and NVIDIA, TSMC CEO C.C. Wei stated in June that the appreciation of the New Taiwan Dollar has caused the company's operating profit margin to decline by several percentage points.

The Largest Capital Injection in History to Address Exchange Rate Fluctuations

According to a statement from Taiwan's Investment Commission, this capital injection is primarily for general investments, including bank deposits and bonds. The statement noted that the purpose of the injection is to allow TSMC to transfer its foreign exchange holdings to its subsidiaries to help reduce hedging costs.

TSMC Global is responsible for managing overseas investments and hedging operations, and this capital injection will provide greater capital flexibility to manage exchange rate risks. Notably, this is the company's third similar operation since 2024, significantly larger than the previous two. These capital increases have all occurred during periods of appreciation of the New Taiwan Dollar.

Christopher Wong, a senior foreign exchange strategist at OCBC Bank, pointed out that one typical method of such operations is natural hedging, where companies can match dollar revenues with dollar liabilities while funding U.S. assets and expansion plans, thereby reducing foreign exchange conversion risks.

The Impact of New Taiwan Dollar Appreciation on Export Enterprises

The New Taiwan Dollar has performed strongly recently, with a significant single-day increase in May, marking the largest since the 1980s. The cost of foreign exchange hedging has surged this year, with one-year implied volatility reaching its highest level since 2011 on Wednesday.

The appreciation of the New Taiwan Dollar harms the interests of Taiwanese exporters, as the amount of local currency obtained from overseas sales in USD decreases, or they face the risk of declining demand if they need to raise overseas prices.

TSMC CEO C.C. Wei stated to shareholders in June that the strengthening of the local currency has caused the company's operating profit margin to decline by several percentage points, highlighting the direct impact of exchange rate fluctuations on the performance of the world's largest foundry