Asia Times: Why Taiwan's being easier on foreigners


	December 15, 2000	atimes.com

Special Reports

Why Taiwan's being easier on foreigners
By Tony Allison

1. Accession into the World Trade Organization
2. Regulatory system
3. Market woes
4. International financial center

1. Accession into the World Trade Organization
The announcement by Taiwan's Finance Ministry this week that it will scrap limits on foreign investment in the domestic stock market from January 2 next year reflects the government's on-going policy of financial market reform that it promised during negotiations for the island's accession into the World Trade Organization (WTO).

Taiwan currently maintains a foreign ownership limit on companies listed on the Taiwan Stock Exchange (Taiex) and the OTC Market. The limit was raised to 50 percent in early 1999, up from 30 percent for all foreign investors and from 15 percent for a single foreign investor.

According to the ministry, this limit will be eliminated in January except for certain industries, including telecommunications, power generation, power distribution and mass media companies.

Over the past few years Taiwan has implemented numerous measures designed to liberalize its economy and improve its investment environment to allow it to join the WTO. Taiwan has completed its bilateral consultations for accession and now completing its multilateral working party report.

In November, Taiwan's Minister of Economic Affairs Lin Hsin-yi said formal entry could be expected in late January or early February.

He said that US Trade Representative Charlene Barshefsky had reassured him that the US's stance on supporting Taiwan's entry under the name of "the Customs Territory of Taiwan, Penghu, Kinmen and Matsu" remained unchanged.

He added it is tacitly understood by WTO member countries that Taiwan and mainland China will become full members almost simultaneously. Mainland China has made major breakthroughs in bilateral talks with member countries, contributing significantly to the likelihood of its imminent entry to the global trading body.

2. Regulatory system
In recent years the Taiwanese authorities have taken steps to encourage the more efficient flow of financial resources and allocation of credit. The limit on New Taiwan (NT) dollar deposits that a branch of a foreign bank may take has been lifted. Non-residents have been permitted to open NT dollar bank accounts, which are subject to capital-flow controls. Limits on branch banking have been lifted.

Restrictions on capital flows relating to portfolio investment have been removed. The insurance and securities industries have been liberalized and opened to foreign investment. Access to Taiwan's securities markets by foreign institutional investors has also been broadened.

Taiwan has a complicated regulatory system governing portfolio investment. Officially approved "qualified foreign institutional investors" (QFIIs), including large banks, insurance companies, securities firms and mutual funds, can engage in portfolio investment.

In March 1996, portfolio investment was opened to individual foreign investors and foreign companies other than QFIIs. However, foreign investors are still subject to portfolio investment limits of US$5 million for an individual foreign investor and $50 million for a non-QFII foreign company. The limit on a QFII was raised from $600 million to $1.2 billion in early 1999. Since March 1996, QFII capital flows have not been subject to restrictions. Non-QFII foreign investors may move their capital freely as long as the amount is below $5 million for an individual foreign investor and $50 million for a non-QFII foreign company. These restrictions are also expected to be lifted in January.

3. Market woes
Taiwan's stock exchange has become a major economic concern. Shortly after President Chen Shui-bian took office in March, the Taiex reached a high of 9,115, only to start a long decline to under the present 5,400.

On October 3, events reached a crisis stage when Premier Tang Fei announced his resignation. Although the official reason given was ill health, it is widely believed that he resigned due to disagreements with President Chen over a fourth nuclear plant. Chen said he would halt construction of the plant. Tang, a Kuomintang (KMT) stalwart, had strongly expressed support for it just hours before his resignation.

Tang's resignation resulted in a cabinet reshuffle and political uncertainty. Vice Premier Chang Chun-hsiung was appointed premier and Grand Justice Lai In-jaw selected as new vice premier. Lai, a former vice finance minister with a degree from Harvard, was selected for his financial expertise as well as close ties with the opposition People First Party.

Immediately after Tang's resignation, the Ministry of Finance announced that the daily down-limit for share prices would be halved from 7 percent to 3.5 percent for six trading days as a precautionary measure to prevent panic sales on the bourse.

Despite that change, and efforts by the National Stabilization Fund, the stock market fell 145.52 points on October 4 to close at 5,998. On October 5, mostly due to government intervention, it made a slight rebound to 6,030. In a country where most adults play the stock market as so-called "dispersed players", the continued drop in the market is putting the administration under strong political pressure.

The $16 billion National Stabilization Fund is an emergency fund used to shore up stock prices and the currency when the government believes they are imperiled by rampant speculation.

However, a number of factors beyond the government's control have contributed to the drop in the stock market. World-wide there has been a decline in technology stocks, the sector that accounts for most of the capital on the Taipei market. Foreign investors, whose moves are watched by dispersed players and influence local sentiment, have been pulling out of the market.

Even before Tang's resignation, domestic political instability had investors concerned, especially as it is widely believed the KMT is out to discredit Chen's administration. Continuing setbacks in the fiscal 2001 budget, debates about direct links with the mainland, and questions about the future of the fourth nuclear plant remain significant issues of contention within domestic politics.

Crackdowns on organized crime have further increased fears of internal economic instability. Many small investors are concerned that the campaign may reveal corrupt business linkages, leading to bankruptcies of some companies in the small- and medium-sized enterprise sectors.

There are also unsubstantiated rumors that the KMT has designed a fall in the Taiex to discredit the Chen administration.

The government has responded to drops in the Taiex largely by buying up stocks itself. The government runs four large funds, including the Ministry of Finance's National Stabilization Fund, and it has used them to intervene several times.

Many dispersed investors are critical of government intervention. Citing a tension between saving the market and a desire to not interfere, critics feel the government has made poor policy choices. Often, it belatedly decides to purchase stocks, only to have its hesitation undermine its efforts as foreign investors have predicted which stocks the government will buy.

On September 20, the Ministry of Finance (MoF) and the Ministry of Economic Affairs (Moea) announced two new stimulus measures. The Finance Ministry decided to effectively raise the ceiling on banking investment in the local stock market to $9.63 billion. Local banks are allowed to invest 25 percent of their total deposits.

The MoF was able to relax that restriction by reclassifying banks' redeposits in the postal savings system, previously excluded from the eligible amount, as part of their total deposits. The Moea announced that it would provide $321 million in loans for companies to lease land in five industrial zones across the island.

In November, Finance Minister Yen Ching-chang decried what he called the negative impact of foreign investors, day traders and those who buys stocks on margin on the market. He said the government will try to encourage small investors to put their money in mutual funds, expanding the stabilizing presence of domestic institutions in stock trading.

Foreign institutional investors constitute about 5.5 percent of the stock market, but their influence is out of proportion. Also, 87 percent of trading is controlled by local individual investors and many of them buy shares on margin, in speculative trades or day trading.

Concern that the government lacks economic focus has been blamed for the plunge in stock prices. Yen, who holds a law degree from the University of Michigan and a master's degree in political science from the National Taiwan University, says he is determined to restore order in the economy.

4. International financial center
The easing of restrictions on foreign participation in the stock exchange will also facilitate Taiwan's goal of becoming an Asia-Pacific financial center.

Continuing efforts in the "Asia-Pacific Financial Center Plan" will be in the direction of improving the operating system of domestic banks and establishing a credit rating system.

Other progress includes the reduction of the business tax on financial institutions from 5 percent to 2 percent; revision of the Deposit Insurance Statute in January 1999 to require compulsory participation in deposit insurance by all deposit-taking institutions, and the projected completion of the Taipei International Financial Center in the city's Hsinyi Plan district in October 2002.

The building, which is one of the focal hardware facilities included in the promotion of Taiwan as a regional financial center, will be the tallest building in the world at 508 meters. In addition to financial institutions, it will also house a wide range of other facilities including shops, conference rooms, offices, and an observation platform.

(Special to Asia Times Online)

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