TAIPEI - The latest financial scandal to
rock Taiwan - and one of its biggest in recent
years - has shown that despite much talk of
reforming the banking sector, the island still has
a long way to go. The "financial storm", as
Taiwan's media call it, began early this month
when two subsidiaries of the Rebar Asia Pacific
Group announced they had filed for insolvency.
That led to a run on the Chinese Bank, a member of
the Rebar group, on January 5. The government
quickly moved to take over that and another Rebar
firm
to calm panicked customers.
Then it
emerged that the chairman of Rebar had fled to
China late last month, and was reportedly holed up
in a Shanghai luxury hotel with his wife. Last
week saw an around-the-clock media frenzy as the
chairman's relatives were hauled in for
questioning, regulators scurried to contain the
fallout, the head of the nation's financial
watchdog stepped down, and politicians began
pointing fingers over who else might be to blame.
Most analysts said the bank run would not
impact the larger banking industry, Asia's
fourth-largest. But it's just the latest in a
series of troubles to plague the overcrowded
sector. Taiwanese banks remain frozen out of the
mainland China market by the cross-strait
political impasse.
Meanwhile, plans to
consolidate and reform the financial sector have
stalled. The government hoped foreign investors
would help shake up the industry by buying stakes
in local banks, but so far such activity has been
limited. Now, the Rebar fiasco has highlighted
some of the sector's dubious lending practices,
and the need for better oversight of the island's
financial firms.
"The run on the Chinese
Bank is just a symptom of a larger issue, which is
how do we deal with the banking sector?" said Chen
Ming-chi, with the Institute of Sociology at
Taiwan's National Tsing Hua University.
Dealing with it correctly has broad
implications for the island's future. Taiwan is
now a services-based economy (services account for
more than 70% of gross domestic product and most
of the island's jobs), which means further
productivity gains and development depend on
improvements in key service sectors such as
banking and finance.
For several years,
industry analysts have sent a blunt message: give
Taiwan's banks an extreme makeover, or risk losing
long-term competitiveness and becoming even more
sidelined from regional economic integration.
"Without access to China in the medium
term, the banking sector is structurally
moribund," wrote consultancy Macquarie Research in
a note last year. "We need the structure of the
operating environment to change."
Access
to mainland China appears to be off the table at
least until May 2008, when a new president will
take power in Taiwan. The island's government bars
its banks from providing anything more than
consulting services in the mainland. The
opposition sponsored a bill to change this last
year, but it has gone nowhere, said Christina Liu,
an opposition legislator and finance professor at
both Taipei's National Taiwan University and
Beijing's Tsinghua University.
She said
that days after the bill passed its first reading
in Taiwan's legislature, Beijing made it clear
that it would only allow Taiwanese banks to open
shop in the mainland if a cross-strait memorandum
of understanding were inked. The condition of such
a memorandum is Taiwan's acceptance of the "one
China" principle - a non-starter for the current
independence-leaning government.
That
roadblock has some Taiwanese tearing their hair
out over lost opportunities. Taiwanese banks would
seem to have distinct advantages in the China
market, with their shared language and ties -
particularly in commercially vibrant southern
coastal provinces such as Fujian, which is the
closest culturally to Taiwan. And they have a
built-in customer base of Taiwanese living and
working in the mainland.
But with
Taipei-Beijing relations still frosty, the
island's banks are left to gaze wistfully across
the strait, as the big foreign players such as
HSBC and Citibank get a rapidly growing head-start
in the land grab in China. "Taiwanese banks are
stuck here - they can't do any business in
mainland China," said Liu. "It's really a shame,
because we [could] have so many customers there."
With the door to the mainland bolted shut
for now, that leaves mergers and acquisitions as
the way forward for the industry. Last month,
China opened its banking sector to foreign
investment in compliance with its terms of its
entry into the World Trade Organization.
Consultants have long bemoaned Taiwan's
packed banking sector, which included more than 50
firms in 2000, serving only 23 million people. In
a 2005 report, the consultancy McKinsey argued
that an ideal number would be about 15 at most,
including one or two "regional champions" that
would have the scale to compete in the mainland
Chinese market.
It urged Taiwan to follow
South Korea's example and push ahead with the
politically tough task of sweeping banking reforms
- and to avoid Japan's example of merely
"stapling" together bad banks to create bigger,
but not necessarily better, players.
"Both
industry and government could continue to pursue
their incremental approach and hope the
competitiveness of the financial sector and
broader economy does not further erode," wrote
McKinsey. "Or they could take bold steps to change
the rules of the game and put Taiwan back on the
Asian banking map."
The incremental
approach appears to have won the day. The current
administration has talked up consolidation and
established ambitious goals, but the results have
been modest. Holding companies formed to spur
consolidation have not performed as well as hoped.
Taiwan now has 43 banks, with other
mergers and privatization plans for state-run
banks stalled.
Meanwhile, the government
has worked to attract foreign interest in the
sector, sending road shows abroad to lure big
financial players into buying stakes. That
campaign has had some success: last year several
foreign firms bought stakes in Taiwanese banks,
including Standard Chartered's bid for a
controlling stake in Hsinchu International Bank.
But a more recent deal, Citibank's
reported talks to acquire a stake of the Bank of
Overseas Chinese (BOOC), have foundered amid vocal
opposition from the bank's union leaders. And
analysts don't expect many more such deals: both
Hsinchu and BOOC are small banks, while the larger
state-run banks are seen as less attractive
targets.
All of this leaves many less than
impressed with the government's reform efforts.
"Our government puts very strict limits on
investment in China, while encouraging banks to
merge and attract foreign investment as a
substitute for going to China," said National
Tsing Hua University's Chen.
"I don't
think the government formula can sustain itself,
and it's not good for the banking sector. As long
as there are limits on going to China, I think the
problem will still be there."
Still, some
see a silver lining in the cloud over Taiwan's
banks. Wu Chung-shu, a research fellow at the
Academia Sinica's Institute of Economics in
Taipei, says the worst may be over for the
industry. It has rebounded from a credit bubble in
2005 and early last year, and its bad-loan ratio
has come down from more than 8% in 2002 to just
over 2% now.
Now, Wu says the Rebar crisis
will prompt the government to crack down harder on
shaky firms. "Rebar will push the government to
deal with under performing banking companies by
telling them to get out of the market or merge
with other firms," Wu said. "You're going to see
more consolidation in the banking and insurance
industries. But the number of banks is not the
main issue; it's how to get these banks to operate
in a more efficient way."
Figuring out how
to do that will be one of the most pressing
questions for Taiwan's government in the coming
years.
Jonathan Adams is a
Taipei-based freelance writer.
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