TAIPEI, TAIWAN -- It's amazing what a little money will do to create a sense of confidence.

Take $62 billion in foreign exchange reserves, for example -- the amount of hard cash Taiwan has piled up over the years as a result of its export boom. The island, in a display of confidence, has made a bold decision to reduce those reserves by lifting foreign exchange controls that had been in effect for nearly four decades.

Taiwan made headlines recently when it decided to lift martial law after 38 years, but financial officials say the decision to end foreign exchange controls is an even more momentous event.

The action is part of a plan to stabilize the Taiwan dollar, counter inflation, respond to protectionism in the United States and reform Taiwan's antiquated banking system. Bankers here are calling it the lifting of "economic martial law."

Taiwanese investors can now spend up to $5 million (U.S.) a year overseas without government approval. In the past, the maximum was $5,000.

The new regulations also allow Taiwanese citizens to hold on to their foreign currency instead of forcing them to exchange it for Taiwan dollars.

Officials hope the changes will enable it to take away some of the banking business that now goes to banks in Hong Kong, one of the world's leading financial markets.

Hong Kong businessmen who have grown jittery at the approach of a communist takeover of Hong Kong -- scheduled for 10 years from now -- are investing more in Taiwan. In fact, officials say the flow of Hong Kong capital into Taiwan has increased more than 10 times in the first half of this year.

Once regarded by the rest of the world as a refuge for a defeated army and the potential target of a communist Chinese invasion, Taiwan has begun showing fresh confidence.

One sign of that was the recent lifting of restrictions on direct travel to Hong Kong by Taiwan tourists.

The government had barred tourists from making the British colony their first stop overseas, ostensibly in order to prevent capital flight. But nearly everyone acknowledges that the real reason was concern that Taiwan citizens would use Hong Kong as a jumping off point for contact with mainland China.

Western observers say that the Taiwan authorities have learned that they have little to fear from citizens who, either out of curiosity or a desire to see relatives, visit the mainland. Most of them apparently come back convinced that life on Taiwan is superior to that on the mainland.

Officials also boast of a significant reversal of the "brain drain" to the United States. They say that increasing numbers of Taiwan students who went to the United States to get their degrees have been returning to work on the island.

At one time several years ago, one western analyst said, only about 15 percent of the students returned. Now, he said, the figure is up to 30 percent, a reflection of the growing difficulty of finding jobs in the United States and the increasing attractiveness of jobs in Taiwan, the analyst said.

Taiwan computer engineers who launched successful careers in California's Silicon Valley also are returning in greater numbers. Several major producers of hard disc drives from the valley have moved their manufacturing operations here.

Another sign of confidence is that people here, especially the young, are beginning to enjoy their wealth more. Fancy gourmet restaurants and glitzy discos with names like "Kiss" and "Touch" are the rage in this city of 2.5 million.

Only 25 years ago, this was a sleepy city that looked like a big village. It was more pleasant to travel in a three-wheeled pedicab than by car, and no one seemed to be in a hurry anyway. Nowadays, hurtling across the crowded city in one of Taipei's tiny cabs can be a nerve-wracking experience.

Some members of the older generation fear that the fast pace of change and the pleasure-seeking of many young people will destroy Taiwan's moral fiber and stability. But this is still a society in which drugs are only a minor problem, and the savings rate is one of the highest in the world.

While many other developing countries suffered from heavy debts, Taiwan piled up the highest foreign exchange reserves per person in the world. The $62 billion total in reserves is exceeded only by the reserves of Japan and West Germany.

At one time, the reserves and strict foreign exchange regulations were meant to serve as insurance against a communist attack, guaranteeing that the nation could purchase goods and weapons.

But in recent years, the island's reserves have become a source of confidence tinged with anxiety, growing so large that they were pushing the Taiwan dollar upward with the potential of causing Taiwan's exporters to become less competitive.

Whether Taiwan investors can take full advantage of the freer economic atmosphere remains unclear. Their experience in international financial markets is limited, and they have yet to show the confidence that is needed in many long-term investments.

In addition, Taiwan's banking bureaucracy is still heavy-handed and slow moving. It may be no easy matter to compete for international banking business with sophisticated Hong Kong, but the desire to do so is increasing, and so is the confidence.