Taiwan Today

Expectations were running high when, in January of this year, the government opened the Taiwan bourse to direct investment by overseas institutions. But investment inflow has been disappointingly slow. Government officials had hoped that foreign financial institutions—banks, insurance companies, and fund management firms—would infuse much-needed capital into the bourse. They had also anticipated that the entry of foreign institutional investors would correct the market's abnormally high ratio (95 percent) of individual investors.

According to government policy, the opening of the stock market to foreign investment would take place in three stages. The first stage allowed foreigners to invest here indirectly, through fund management firms. The entry of foreign institutional investors in January represents the second stage. The final stage, for which no timetable has yet been set, calls for allowing in foreign individual investors.

As of the end of July 1991, twelve of the fifteen foreign institutions that had applied to invest in the Taiwan stock market received the approval of the Securities & Exchange Commission (SEC) of the Ministry of Finance (MOF). Altogether, they had committed more than US$500 million in investment capital (the maximum amount for each institution was US$50 million). However, total funds actually remitted in by July were only slightly above US$100 million. The SEC was apparently disturbed by the inactivity. In a recent report to the MOF, the SEC said that foreign institutional investors had not responded to the opening of the Taiwan stock market as eagerly as had been expected.

Jack Yeh is one of the many market specialists who agree that the response has been far from exciting. Yeh is the vice general manager of the National Investment Trust Company, one of four Taiwan fund management firms which solicit funds overseas for investment in the local stock market. "I can say with certainty that the response was not warm," he says, citing that since the market opened in January, only fifteen institutions had applied. He also pointed out that the more than US$500 million in investment capital committed by the twelve approved institutions is even less than one-fifth the US$2.5 billion quota that foreign institutions may invest in listed stocks. Daniel Chiang, vice general manager of the International investment Trust Company, also a fund management firm, adds that many foreign institutional investors simply do not have enough money to invest abroad, particularly at a time when capital shortages are hitting businesses almost everywhere in the world.

But all the market specialists interviewed for this article unanimously agree that rigid restrictions are playing a big part in keeping foreign investors away. John Crossman, a director at Jardine Fleming Broking Limited, one of the twelve foreign institutional investors which obtained government approval to invest here, complains that no other Asian market im­poses as many rules as Taiwan does. He cites regulations that restrict outward re­mittances, limit the number of investment accounts to only five, and require that principal and capital gains accounts must be treated separately.

Crossman says that foreign investors especially object to capital movement controls, because it is necessary for them to move their money back and forth between various markets in accordance with changes in economic conditions. "Foreign fund management companies in Asia like to switch their money as opportunities arise," he says. "So one month they may like Thailand, the next month they may prefer Malaysia, and in the third month, they might want to put more money in Taiwan. If they cannot freely move their funds out of this island because of the government's capital movement controls, they have to ignore this market." Accord­ing to Crossman, Jardine Fleming plans to invest the maximum allowable capital of US$50 million. But as of late July, the Hong Kong-based company had remitted in only US$12 million. He says that if Taiwan really wants to attract more for­eign equity investment, it will have to re­move or relax its rules.

The negative effect of the restrictions on the willingness of foreign institutions to invest in the Taiwan market has not escaped the attention of the SEC. In its recent report to the MOF, it advised the govern­ment to relax some of its restrictions. It proposed that outside remittance of capital gains be allowed every three months, instead of only once a year. But according to Chiang of International Investment Trust, the proposed change will not be helpful to investors in managing their funds. ''They are especially concerned with the restriction that investment principal must remain in Taiwan for at least three months. It is important for this limitation to be liberal­ized as well," Chiang says.

The SEC has no plans at this time to change the investment principal remit­tance rule. The limit has only been recently reduced from one year to three months. According to a senior source at the SEC, further cuts will only encourage short-term investment. "We don't welcome this kind of investment as it tends to have adverse effects on market stability," he says.

But the SEC proposed relaxing two other regulations. One requires that for­eign institutions must remit into Taiwan all of their planned investment capital within three months after gaining approval to invest in the market. The new time limit has yet to be determined. The other regu­lation states that foreign institutions can only put their unused investment capital in demand deposit accounts. The SEC now plans to allow them to invest such capital in higher-yielding short-term financial instruments, such as certificates of de­posits.

A side from the restrictions, no other major problems appear to be discouraging foreign insti­tutions from investing in the local stock market. For example, the bourse's highly speculative nature does not seem to be a concern. Yeh of National Investment Trust says that speculation exists in stock markets around the world, and the Taiwan market's susceptibility to speculation has nothing to do with the lack of enthusiasm on the part of foreign investors.

Crossman of Jardine Fleming echoes this view. As he sees it, the Taiwan stock market is still filled with speculators. "But foreign investors are not scared of specu­lation," he says. "They don't play the game. They care only about which com­panies will be good in the future. We like industries such as electronics, steel and iron, wire and cable, textiles and, sometimes, plastics. And we like the overall Taiwan economy, which is very strong."

Although the Taiwan Stock Ex­change index has dropped more than 60 percent since the market crashed in February 1990 from the unprecedented peak of 12,490 points, local average share prices are still among the highest in the world. Its current average P/E (price­-earnings) ratio is 30, compared to 11 in Hong Kong and 19 in the United States. It is only lower than that of a few other markets, such as Japan whose average P/E ratio now stands at 40. Still, says Crossman, Taiwan's relatively high share prices are "not a big problem" for foreign investors.

Chiang says that local share prices are high only in average terms. This situation, he adds, is a result of over-priced banking stocks, which account for about 35 percent of the weighted Taiwan Stock Exchange index. He also notes that the stocks of a lot of manufacturing companies are actually low-priced. Chiang points out that many listed industrial companies have strong growth potential because they are now upgrading their manufacturing techniques in the face of high labor costs at home and strong competition abroad.

In recent months, the Taiwan Stock Exchange index has been hovering in the neighborhood of 5,000 points since it re­bounded to a high of 6,365 points on May 10, 1991. The market's average daily turnover also remained in the range of US$1.1 billion during the last few months, in contrast to the daily value of several billions of dollars registered in the two years before the February 1990 crash. Opinions are divided as to the reasons behind the largely unchangeable index and the sharp reduction in trading turnover.

According to some financial analysts, the government approval in June of new, private commercial banks is the major cause of the fall in trading turnover as the banks were pulling out substantial amounts of money from the market. The new banks were each required to raise the final deposit on the minimum paid-in capital of US$370 million within three months of receiving approval. Another reason is that the government, beginning this year, has drastically increased its bond issues in order to raise finances for public­-sector construction projects. It is predicted that the fund drain will keep the stock in­dex lingering between 5,000 and 6,000 points in the months ahead.

Yet some analysts take the less vola­tile trading activities as a sign that the stock market is stabilizing and maturing, and they are optimistic about the market's prospects. Crossman predicts that the stock index will surge past 7,000 in the next six months. One major reason, he says, is that brisk export activity is boost­ing investor confidence in listed compa­nies. It is also increasing the exporters' income, which can then be directed to investment in the stock market.

Crossman also thinks that "there will not be any big liquidity problem" in the months ahead. As he explains it, the money borrowed by the government through bond issues is mainly being used to buy land. It can be expected to flow back to the marketplace quickly as landlords begin to use their proceeds from land sales to buy shares and engage in other invest­ment activities. As for the funds being raised by the new banks, he says, "This money is not disappearing. It's like taking money out of one pocket and putting it in the other. As soon as these banks open for business, they will lend very aggressively in order to compete for a share of the loan market."

It was hoped that opening up the stock market to foreign investors would raise much-needed capital and correct the im­balance between institutional and individual investors. Given the confidence that foreign investors already have in the economy, the way for the government to ease their reluctance to invest in the stock market is to relax restrictions quickly. It can only help bring about a more stable and more viable stock market.—Osman Tseng (曾慶祥) is a senior journalist based in Taipei.