By the end of 2008, the government plans to turn Taiwan into a regional financial center.
Last September, the Council for Economic Planning and Development (CEPD)--after drawing up provisional action plans and holding more than 20 preparatory meetings around the island--held the National Conference for Service Industry Development. With participants from the government, the private sector and academia, the conference aimed to gather a consensus on development strategies for 12 selected categories in the service sector. Two months later, the Executive Yuan worked out the guideline for a four-year (2005-08) service industry development project called Brighten Taiwan's SMILE (Service, Market, Inno-value, Life and Employment).
The Executive Yuan believed that the financial service sector should be tackled first. The flagship plan for the sector is to develop Taiwan into a regional financial service center. The plan aims to construct a financial environment that is up to international standards and is capable of supporting other industries. It also seeks to promote the competitiveness of the financial service sector in order to develop Taiwan into a regional financial center. The focus, according to CEPD Vice Minister Thomas Yeh, is to make Taiwan the region's capital-raising center and asset-management service provider.
The idea of developing Taiwan into a regional financial center was first brought up in the early 1990s and developed into the Asia-Pacific Regional Operations Center (APROC) plan launched in 1995. A regional financial operation center was proposed to provide better financial services and support the development of other industries, thereby advancing the nation's overall economy.
The financial center in the APROC plan was to be implemented until the year 2000 and further expanded. The fact that Asia had already become a major investment area for Western investors at the time prompted Taiwanese officials to take advantage of Taiwan's substantial economic resources and foreign exchange reserves. Moreover, turning Taiwan into a regional financial center seemed promising. The regional financial center plan, however, never fully got off the ground. Both the government and the private sector realized that Taiwan was not really prepared to compete against established financial centers in the region, and Taiwan's financial situation was not encouraging due to the 1997-98 Asian financial crises and the September 21, 1999 earthquake.
Taking all these factors into consideration, adjustments on financial policy were made when the Democratic Progressive Party became the governing party in 2000. Rather than rushing to build Taiwan into a regional financial center, the economic planners put the emphasis on a series of financial reforms, with the objective of solving Taiwan's problems--modernizing the local industry and the overall financial environment, and further liberalizing the market to match those of advanced economies.
Setting up the legal framework was the first step for the project. Several laws, such as the Enterprise Act, the Banking Law and the Financial Institutions Merger Law, passed or were revised by the Legislature in 2000. A special Legislative Yuan session was held in 2001 to review six financial reform bills including the Financial Holding Company Act, the Act Governing Bills Finance Businesses and the Act for the Establishment and Administration of the Financial Restructuring Fund. (The financial restructuring fund is a US$4.3 billion fund used for cleaning up bad loans.)
The Challenge 2008 plan was launched in 2002 as the blueprint for national development. When asked why a regional financial center was not included, then CEPD Vice Minister Ho Mei-yueh said that Taiwan was not as well-equipped as Singapore or Hong Kong to play the role of a financial hub. Financial reform, nevertheless, continued to be emphasized in the Challenge 2008 plan. The objectives were to set up a financial monitoring system in accordance with international norms and standards, to make the securities market stronger and healthier, and to accelerate the disposal of nonperforming loans to enhance Taiwan's financial competitiveness.
A task force headed by then Vice Premier Lin Hsin-i was formed to combine the wisdom and experience of government agencies, experts and scholars. The task force decided that Taiwan needed to improve two key areas: financial supervision and regulation. For many years, supervision, management and inspection have been the responsibilities of a number of agencies, and the idea of a single organization to deal with the matter was often brought up, only to be defeated by bureau cratic wrangling. After the Financial Holding Company Act was passed and companies started operation, the ever-increasing mergers and alliances between financial service groups became an even greater concern. In order to avoid the potential problem of overlapping management due to multiple supervisory systems, it was necessary to set up a single system to deal with all insurance, securities and monetary affairs.
The establishment of a Cabinet-level independent commission to supervise and manage Taiwan's financial industry was approved by the Legislature in 2003. In July 2004 the Financial Supervisory Commission (FSC) was formed by combining several existing organizations under the Ministry of Finance and the Central Bank of China (CBC).
The FSC's major tasks, said Minister Kong Jaw-sheng at the commission's inauguration ceremony, are to encourage mergers among financial institutions, further develop the bond market, enhance Taiwan's competitiveness to attract foreign investment, promote innovation in insurance products and effectively use mid- and long-term capital in the insurance market. The FSC also emphasizes the need for China-based Taiwan businesses to be listed on the Taiwan stock market and for Taiwan's banks to be able to set up branches in China.
While the FSC was being organized, previous financial reforms were producing encouraging results. Local banks' average nonperforming loans, for example, dropped by half from 8 percent in mid 2002 to 4 percent at the end of 2003. Fourteen financial holding companies have been set up since the law passed in 2001. The number of foreign companies setting up in Taiwan and the amount of foreign investment have also increased.
With the set up of the FSC and encouraging results from financial reforms, the government is confident that Taiwan is ready to become a regional financial center. In mid 2004, a task force with the ministers of the CEPD and FSC serving as co-conveners was established to promote the plan. Members include heads of the ministries of finance and economic affairs, the Mainland Affairs Council (MAC), the CBC, academics and business people.
Immediately after its establishment, the task force held a number of meetings and seminars with representatives from local industries as well as top international players from the financial sector. CEPD Vice Minister Thomas Yeh, who is also one of the two executive secretaries of the task force, says that Taiwan's competitive advantages are its foreign reserves, commerce and trade sophistication, solid industrial foundation and sound infrastructure. The weaknesses and challenges, meanwhile, fall on uncertain cross-Strait relations and further deregulation.
The task force suggested a number of solutions, such as drawing up a financial service law to govern banks, insurance companies and other financial institutions that are currently regulated by different laws, as well as encouraging mergers so that Taiwan has fewer but larger financial holding companies and banks that can compete on an international scale. Other suggestions include looking into the possibility of allowing overseas mutual funds to raise capital, issue funds or provide consulting services here. Permitting securities brokerages to serve as agents in selling overseas bond products was also discussed.
An important step in turning the suggestions into reality is to revise a dozen laws and draft a financial service law. Kong Jaw-sheng says that since the advent of financial holding companies, different financial products have been introduced to the market as a result of the integration of banks, securities and insurance companies. The integrated service providers operate under different regulatory regimes. In order to consolidate financial services and meet market demand, Taiwan needs to create an umbrella law to regulate these services.
Although these suggestions have only been on the table for a few months, some of them are already being acted upon. The FSC, for instance, is seeking to ease restrictions on the flow of funds to China for Taiwanese companies. It is also working with the MAC to open the stock market to allow China-based Taiwanese companies to sell shares, and those whose headquarters are in Taiwan are to be put on a priority list for raising capital on the stock market.
The FSC is also revising outdated rules to work out a negative listing for the authorization of new financial products, thereby further removing technical barriers that may prevent the industry from progressing. These new regulations--the negative listing--will specify only financial products that are prohibited rather than those that are permitted.
Although there is still a lot of planning to be done, Thomas Yeh is confident that with further liberalization, there will be more room to develop financial products in insurance fund and banking services. He believes Taiwan can replace Hong Kong as a regional financial center in three to five years. This presumption, however, is too optimistic for some. Yang Ya-hwei, a researcher at Chung-Hua Institution for Economic Research and director of the organization's Center for Economic and Financial Strategies, thinks the plan still has a long way to go.
Yang says that a regional financial center needs to be equipped with a strong economy and financial power, the free flow of capital and manpower, competitive tax rates, sound infrastructure and sufficient professional expertise. She says Taiwan's advantages, a rapidly growing market, service providers, and plenty of foreign reserves and domestic savings, are all key to the government's goals. However, she also warns that Taiwan faces challenges from home and abroad that are not likely to be overcome in a short period of time.
In order to attract international capital, Yang says, Taiwan must first have a capital market that is competitive with those of existing regional financial centers such as Hong Kong and Singapore. Currently, however, the Taiwanese market is still rather small compared to its competitors. Although Taiwan is in the process of liberalizing, it has regulatory restrictions that limit the flow of capital and manpower. Such restrictions have led international investors to regard Taiwan's reputation, when it comes to capital markets, as less than stellar. In the 2004 IMD World Competitiveness Report, the reliability of Taiwan's stock market information ranked 34th--much lower than Singapore (3rd) or Hong Kong (22nd). Insider trading is more of a problem in Taiwan than in those places. To attract more investment, Taiwan needs to improve its image.
Professional manpower is another concern. The weakness of Taiwan's financial professionals is their English language skills, which are crucial to international financial operations when communicating with clients or researching global financial markets. To compete with the region's existing centers, Taiwan needs to expedite steps to upgrade domestic financial service professionals' skills, as well as recruiting foreigners.
Cross-Strait relations are also a pressing issue and political stability is always a key factor in any business' evaluation. It is Taiwan's policy to maintain a stable and peaceful development in cross-Strait relations so that political interference in the financial market can be minimized. There is no guarantee, however, that China--who does not want to see Taiwan becoming any kind of regional center--will adopt the same policy.
Analyzing all of Taiwan's strong points, weaknesses and challenges, it remains to be seen whether Taiwan can replace Hong Kong in three to five years, or even become a regional financial service center at all. Yet whatever the outcome may be, it is clear that the process itself is liberalizing Taiwan and improving its financial environment.