Taiwan's foreign currency reserves shrank considerably in March during China's show of military strength, but bankers and economists are worried about the possibility that renewed capital inflows may put upward pressure on the New Taiwan dollar. The cross-strait crisis sparked panic buying of US currency in cash, and forced the Central Bank of China to expend considerable funds in defence of the New Taiwan dollar at NT$27.5 to the greenback. Since the election on March 23, the NT dollar has risen to NT$27.15 against its US counterpart. Central Bank of China deputy governor Paul Chiu Cheng-hsiung acknowledged that Taipei's forex reserves fell by US$7.5 billion in March to US$82.5 billion, nearly US$2 billion greater than the shortfall expected by central bank economists interviewed in mid-March. According to Chou Ah-ting , deputy-director of the central bank's foreign exchange department, the apparent gap was due to nearly US$500 million in exchange rate losses due to the strong US dollar and US$1.4 billion in civilian purchases of US dollars in cash, mostly during the week after Beijing announced the first set of exercises on March 5. The forex reserves also were drained by stronger import demand in March, including for petroleum and mineral products and automotives, up to US$1.7 billion, a net outflow of US$3.5 billion due to other economic factors, including trade-related exchange settlements, and about US$400 million in foreign exchange lending by the central bank. Mr Chou said: 'Pressure on the NT dollar to appreciate does exist with the return of capital and conducting of collections delayed in March, but it's not as strong as reported in the media. 'The return of capital will be gradual and extended over a longer period of time, and the monetary situation is returning to normal,' he said. Over the nine months of mainland pressure since last July, bankers estimate that about US$14 billion in capital may have left the local market, but add that much of the apparent outflow was deposited in foreign currency accounts in Taiwan. Such accounts rose by more than 50 per cent from NT$160 billion at the end of July 1995 to NT$239.9 billion by the end of February and clearly rose further in March, although statistics are not available on the actual end-March total. But bankers and financial observers report that funds are clearly flowing back, particularly after confidence in the island's financial markets received a boost with the victory by President Lee Teng-hui , in the election. The most obvious sign is rising foreign investment in the island's stock market, which has jumped from below 4,400 points in mid-March to fluctuate about 6,000 points in the past week. The volume of daily transactions has occasionally topped NT$100 billion, compared to about NT$20 billion during usual trading in March. Central bank officials reported earlier in April that, after the NT dollar recovered strength from the presidential election, funds in foreign currency accounts slimmed by an average of NT$150 million to NT$200 million daily. Another favourable omen comes from early indications that the island's exports will bounce back to normal after stagnating in March. Largely due to a negative growth in exports to the mainland and the US, the island's merchandise exports reached only US$9.02 billion in March, 0.3 per cent less than the same month last year, while imports were 1.5 per cent lower at US$8.16 billion. But customs data released on Thursday showed that Taiwan's export and import trade rebounded in the first half of April. Merchandise exports amounted to US$4.48 billion, more than 25 per cent compared to the same period last year, while imports rose more than 17 per cent to US$3.74 billion, but a finance ministry spokesman advised the figures would be lower after seasonal adjustment. Chen Po-chih, a research fellow at the private Taiwan Institute for Economic Research (TIER), said that the problem was how to handle the upward pressure on the NT dollar generated by the return capital. Central Bank of China governor Sheu Yuan-tung said on Thursday he was concerned the NT dollar could be rising too rapidly and the bank did not want the competitiveness of Taiwan's exports to be affected.