Good news for foreign investors interested in the Taiwan stock market: the ceilings on foreign investment in the bourse are no more. In February, the Central Bank of China and the Ministry of Finance removed the long-standing limitations and the new policy has already partially gone into effect. The move comes after a lengthy, heated debate between the bank and the Securities & Exchange Commission (SEC). The Central Bank was concerned that an influx of foreign capital could exert pressure on the New Taiwan dollar, triggering inflation and causing share prices to rise. But the SEC argued that foreign funds are necessary to strengthen and stabilize the bourse.
With the liberalization, overseas professional institutions and local investment trust companies engaged in raising stock buying capital from abroad will no longer be subject to any maximum amount on foreign investments remitted into Taiwan. Previously, the ceiling was set at a combined US$10 billion for the fifteen Taiwan fund-management firms with ROC government approval to invest foreign capital in the Taiwan Stock Exchange (TAIEX) and the eighty-three approved foreign institutional investors. Most of these foreign investors are based in the United States, Britain, Japan, and Hong Kong.
Instead, foreign investments will be limited only by the ratios of the shares held in local listed companies. These ratios have also been liberalized to allow any one foreign investment institution to purchase up to 6 percent of the total shares of any single listed company. Combined foreign investment in any listed firm cannot exceed 12 percent of its total shares. With these revisions, the Central Bank hopes to allow more foreign investment in the TAIEX, while continuing to prevent overseas investors from gaining control of Taiwan’s blue-chip companies.
In dollar terms, this measure is significant. Based on the bourse’s total market value at the end of 1994, the new 12 percent share ratio regulation means that foreign investors may buy nearly US$30 billion worth of local stocks, a two-fold increase over the previous maximum.
By allowing more foreign capital into the stock market, the then Central Bank Governor Liang Kuo-shu (梁國樹) ended a lengthy war of words with Vice Minister of Finance Linin Day (戴立寧), who is former SEC chairman and a strong advocate of liberalizing foreign equity investment. Since last May, Day had been pushing the Central Bank to liberalize foreign investment restrictions.
Day emphasized several reasons for the change. First, increasing foreign investment could help increase demand at a time when more local companies are seeking to list their shares on the stock exchange. Also, increased foreign investment could help improve the bourse’s investor structure and thus its health. Currently, the overwhelming majority of investors in the TAIEX are individuals. While institutions tend to stress corporate performance and the strength of the overall economy in their buying patterns, individual investors are more likely to engage in short-term transactions for quick profits, a practice that adds to market volatility. Another reason cited in Day’s push toward greater liberalization is the global shift toward freer foreign investment.
But the Central Bank initially stood firm against the SEC, citing potential adverse effects on financial markets. It worried that an increased inflow of foreign equity capital could drive up the exchange rate of the New Taiwan dollar, which in turn, would undermine the competitive ness of local exports. Moreover, increased capital inflow could cause sharp rises in the money supply, a development that could spark inflation. The Central Bank also warned that foreign funds can be pulled out of Taiwan at any time, to protest local political or economic changes, or simply to seek more profitable opportunities elsewhere. A massive withdrawal of funds would trigger a steep fall in share prices and a devaluation of the NT dollar.
Although the Central Bank finally agreed to liberalize foreign investment in the stock market, it is still unclear whether the new policy will allow equity capital to flow into Taiwan with significantly greater ease. The Central Bank still has the right to determine the speed of the influx. Specifically, it can decide how rapidly to approve the applications of foreign investors based on its evaluation of actual economic conditions, including exchange rate trends, the growth rate of the money supply, and share prices.
In other words, the Central Bank could take a go-slow approach in screening cash remittance applications if it fears that a faster influx of capital could cause the NT dollar to appreciate or could trigger a rise in stock prices. The bank has often used such a strategy in the past. For example, last year it frequently held up investor applications when stock prices increased dramatically.
Dollar daze—The Central Bank originally opposed lifting the ceiling on foreign investment. Among other things, it feared a rise in the money supply, which could trigger inflation.
The Central Bank accompanied its liberalization measures with several strict new regulations governing the use of stock buying funds remitted into Taiwan by both foreign institutional investors and local investment trust companies. Under these rules, at least 75 percent of the funds remitted must be invested in the TAIEX within three months after arriving in Taiwan. To meet this stipulation, investors may be required to deposit into the Central Bank, free of interest, any sums that have not yet been invested. Investors can put a portion of their remittances into time deposit accounts or invest in short-term commercial paper, but each such investment must not exceed 10 percent of the total funds. Another regulation requires investors to send their money to Taiwan within four months of approval by the Central Park, instead of the previous six months.
Analysts fear that these rigid regulations will limit the flexibility that foreign investors need in managing their funds. Investors have no reason to enter the Taiwan market if prices keep moving downward and show no sign of an upturn. Under such circumstances, they will want to put their funds outside the bourse, if just for the reason of hedging.
Thus, it remains to be seen whether the Central Bank’s liberalization measure will encourage an increased inflow of equity capital, especially at a time when international funds are flowing into the United States to cash in on higher American interest rates.
Stuck on the docks? Critics also worry that too much foreign investment could undermine export competitiveness by driving up the NT dollar exchange rate.
On the other hand, the Central Bank and the Ministry of Finance are currently considering a number of additional liberalization measures. These include opening the local bourse to direct investment from foreign business enterprises and individuals, and allowing foreign enterprises to list their shares on the TAIEX and to issue Taiwan Depository Receipts, certificates issued by local banks stating the number of shares deposited in Taiwan and their monetary value in NT dollars (much like American Depository Receipts). Many analysts are pushing for such changes, arguing that a freer flow of capital movement into and out of Taiwan is critical for the development of a mature stock market.
Osman Tseng (曾慶祥) is a senior joumalist based in Taipei. This article was reprinted and adapted with permission from Business Taiwan, a weekly newspaper published by the United Daily News Group.