At the end of November 2011, an unusual show was held at an exhibition hall at Taipei’s World Trade Center. The two-day event was dubbed the Taiwan Stock Exchange (TWSE) Listed Companies Expo and was one of a series of activities marking the bourse’s 50th anniversary. A visit to the exhibition gave attendees an opportunity to check out the booths of more than 80 large TWSE-listed companies and attend lectures by experts about the local stock market. The main point of the show, however, was visible in the panels with text and old photos that celebrated the TWSE’s role in Taiwan’s economic development. “The stock market is a window on the economy of a nation,” says Chi Schive (薛琦), the exchange’s chairman. “That’s why the TWSE’s transformations and expansions fully reflect those of the ROC [Republic of China] economy as a whole.”
The exchange’s founding in 1961 was tightly linked to the land reform effort launched by the central government in the late 1940s, a campaign that granted ownership of farmland to the tenant farmers who tilled it. The original landowners who lost land in the reform process were compensated with freely tradable shares of stock in the Taiwan Cement Corp. and three other large government-run enterprises. At the same time, private brokers began actively trading stock from bases like Dihua Street in Taipei City. With information on stock values hard to come by and little transparency in the market, the prices such brokers asked for securities often appeared arbitrary. In the face of this growing but unofficial, unregulated and disorganized stock market, the government began to consider setting up an exchange to improve management and oversight.
The United States was also a backer of the establishment of a stock exchange in Taiwan. Washington began providing US$100 million in annual economic aid to Taipei beginning in 1951. Both sides understood, however, that the US aid would not continue indefinitely. The US government therefore recommended an eight-point economic plan to help Taiwan gain economic independence that included building a capital market. In 1958, the US government began sponsoring visits by ROC government officials to the United States, where they collected information about the operations of the New York Stock Exchange and other economic institutions. US economic aid to Taiwan came to an end in 1965.
The TWSE officially began to operate in 1962 with 16 listed companies with a combined market capitalization of NT$6.84 billion (US$171 million at the exchange rate in 1962). Koo Chen-fu (辜振甫, 1917–2005), an influential entrepreneur and a key figure in negotiations with mainland China in the 1990s, served as the first chairman of the new bourse.
A TWSE worker writes figures on a blackboard in the 1960s. The exchange’s founding was linked to the land reforms of the late 1940s and US government recommendations in the late 1950s. (Photo Courtesy of Taiwan Stock Exchange)
824 Companies
Today, the TWSE, which is regulated by the ROC’s Financial Supervisory Commission (FSC), is one of the major stock exchanges in Asia. According to the World Federation of Exchanges, at the end of January this year the TWSE had 824 listed companies and ranked eighth in Asia in terms of market capitalization with a total value of US$636 billion. In 2011, the TWSE ranked as the No. 6 exchange in Asia in trade value with a total of US$890 billion. In both categories, the Tokyo Stock Exchange and Shanghai Stock Exchange took the top two positions. As of January this year, there were nearly 16.2 million accounts that had been opened at traders’ offices in Taiwan by 8.9 million individual and institutional investors. Of those investors, 3.3 million made at least one transaction in 2011.
Over the past three decades, many improvements have been made that helped the bourse grow into today’s efficient and safe trading platform for companies and investors. “Taiwan’s stock market didn’t undergo really significant reforms until the late 1980s,” Schive says. “During this period, the government built a solid foundation for the TWSE’s development.” In 1988, one of those reforms was a revision to the Securities and Exchange Act that allowed more traders to participate in the exchange. In 1990, another reform saw the TWSE begin actively monitoring stock transactions for irregularities, while the FSC pushed for the formulation of generally accepted accounting principles at around the same time. “Before then, enterprises could slant their accounting in a way that made their financial statements look good,” says Cheng Ting-wong (鄭丁旺), a professor of accounting at National Chengchi University (NCCU) in Taipei. “But now that their financial statements are more credible, investors naturally have more confidence in the equities market.”
Meanwhile, restrictions on the flow of international funds into Taiwan’s stock market were loosened in 1983, when the government allowed the first domestic investment trust companies to use capital they had amassed overseas to invest in TWSE securities. In 1991, international institutional investors who met specific criteria were given permission to invest directly in Taiwan’s stock market as qualified foreign institutional investors (QFII). Such investors operated under a maximum overall quota that reached US$3 billion each in 2003, when it was scrapped altogether. General foreign juristic persons and foreign natural persons—or, in plain English, less tightly screened foreign institutional investors and foreign individuals—were allowed to invest in TWSE companies in 1996, although they also operated under a quota system. There are no quotas placed on such investors today.
As the regulatory structure governing the exchange was modernized, so too were its facilities. “The workers who continually wrote prices and figures in chalk on the blackboard and then erased them were worried about breathing in chalk dust,” former TWSE employee Chu Jing-ping (朱津平) says of the days before the bourse displayed such information electronically. “So they often had soup with pig’s blood pudding to cleanse their lungs,” he adds, as the soup is reputed to have that healing effect. The chalk dust ceased to be a problem after electronic stock tickers were introduced in 1972.
Completed in 1993, the TWSE’s computerization helped ensure efficient and safe transactions. (Photo Courtesy of Taiwan Stock Exchange)
The TWSE’s most important facilities breakthrough was likely the computerization of transactions, an effort begun in 1985 and completed in 1993. Going digital not only made the transaction process easier, but also had the effect of reducing insider trading and other illegal practices, as data for each transaction was saved and could be easily examined for irregularities by authorities. The new TWSE system was highly praised by a ranking official of New York-based NASDAQ, now the world’s second-largest stock exchange, during his visit to Taiwan in the mid-1980s. The TWSE’s system was so successful that when the Kuala Lumpur Stock Exchange, now known as the Bursa Malaysia, decided to go electronic, it duplicated Taiwan’s system.
Over the years, the TWSE has occupied several buildings around Taipei. In 2005, it moved again, this time relocating to Taipei 101, a landmark skyscraper often hailed as a gleaming icon of modern Taiwan.
Around 1990, the policy reforms, facility upgrades and Taiwan’s booming economy combined to inspire a collective sense of giddiness about Taiwan’s stock market. The number of TWSE traders increased from 28 to the exchange’s all-time high of 374 in 1991, while the market index skyrocketed from around 636 in August 1985 to peak at 12,682 in February 1990, another historic high. According to Schive, on several days around that time, the total value of shares traded on the TWSE surpassed the total value of shares traded on the New York Stock Exchange.
“It was so crazy. No sooner did the market open than many of the stock prices hit their upper limits,” says Lee Jing-tu (李金土), an individual investor at the time. “Investing in the stock market was pretty much a national movement. Traders really made great profits then.” For the most part, the market continued its impressive gains as the 1990s went on, with its market capitalization rising from 1990’s NT$2 trillion (US$74.4 billion at the exchange rate then) to hit 1999’s NT$12 trillion (then US$371.9 billion).
The stocks listed on the TWSE often mirror the country’s industrial makeup. In 1990, the combined value of companies in the local information technology (IT) industry accounted for only 2.7 percent of the exchange’s total market capitalization, or about NT$74 billion (US$2.75 billion), but by 1999 IT stocks had grown to account for 54 percent of the bourse’s capitalization. “During this period, the IT industry grew rapidly alongside the stock market,” Schive says. “Today, dozens of enterprises in this sector are each worth more than NT$70 billion (US$2.3 billion). How could the sector have taken off and become the backbone of Taiwan’s economy if there’d been no sound capital market to rely on back then?”
Since 2005, the TWSE has been located in Taipei 101, a gleaming symbol of modern Taiwan. (Photo by Chang Su-ching)
Size Matters
Along with investors and listed companies, such growth benefited the exchange itself. Referring to growth, Norman Yin (殷乃平), a professor in the Department of Money and Banking at NCCU, simply says “Size matters. The larger the scale of a stock market is, the more stable it is and the more difficult for speculators to manipulate the prices.” A market benefits from growing larger in its depth of capitalization and breadth of investor participation, he adds.
In October 2002, the TWSE teamed up with FTSE International Ltd., an independent company jointly owned by the UK-based Financial Times and London Stock Exchange, to launch the Taiwan 50 Index. Covering the top 50 companies listed on the TWSE by total market capitalization, the index was the first exchange traded fund (ETF) in Taiwan. ETFs trade like a stock but offer investors a quick way to invest in a broad spectrum of the market in much the same manner as an index fund. Aside from its home exchange, the Taiwan 50 Index gained listing on the Hong Kong Stock Exchange in 2009 and is expected to arrive in Japan soon.
To continue expanding, a stock market needs to attract international investors and develop diverse offerings. In January 1998, the TWSE began allowing listed companies to issue Taiwan Depository Receipts (TDR). Through TDRs, companies that make primary listings—or initial public offerings (IPO)—in other countries are allowed to make a secondary listing in Taiwan to raise additional capital. In the late 1990s, Schive notes that nearly all companies offering TDRs on the TWSE were Taiwanese-owned companies operating in Southeast Asia.
Before July 2008, Taiwan imposed three major restrictions on enterprises issuing TDRs, with the first stipulating that companies in which Taiwanese investors held 20 percent or more of all stock shares could not move the capital raised by issuing TDRs outside the country. The second restriction prevented companies in which Taiwanese investors held less than 20 percent of all stock shares from investing the capital raised by issuing TDRs in business operations in mainland China. The third restriction prohibited companies issuing TDRs in Taiwan from being registered in mainland China.
The TWSE celebrates the listing of its first overseas ETF in August 2009. The TWSE targets ETF trade value reaching 5 percent of all transactions by 2014. (Photo Courtesy of Taiwan Stock Exchange)
The first two TDR restrictions were lifted in 2008, while the mainland China registration ban remains. Taiwanese-owned businesses have operated in mainland China for several decades, however, to take advantage of that country’s lower land and labor costs. Such businesses typically form a holding company registered in a third place—such as the Cayman Islands, for example—and operate under that entity in mainland China. The TWSE restriction on TDRs issued by businesses registered in mainland China does not apply to such holding companies. In April 2009, for example, Hong Kong-listed Want Want China Holdings became the first Taiwanese-owned but mainland China-based enterprise to make a secondary listing on the TWSE.
The removal of the two previous TDR restrictions had a great impact on the fundraising efforts of Taiwanese-owned holding companies like Want Want that operate in mainland China. Before the local shareholding rules were lifted, only five overseas companies made secondary listings on the TWSE, two of which have already delisted, while 30 overseas companies made a second listing on the local bourse from 2009 to 2011. Fourteen of those companies are Taiwanese-owned holding companies operating in mainland China.
Overseas IPOs
The TWSE began allowing foreign companies to launch IPOs in July 2008, but several restrictions remain in effect. One of those restrictions holds that overseas companies applying for a primary listing on the TWSE may not be registered in mainland China, while another restriction prohibits TWSE IPOs for companies in which mainland Chinese investors hold 30 percent or more of all shares, unless the ROC government grants special approval. No such approvals have yet been granted.
Of the IPOs that have launched on the TWSE since 2010, 16 have been for Taiwanese-owned holding companies operating in mainland China. Two others have been for American companies including Integrated Memory Logic Inc., which is based in California’s Silicon Valley. Integrated was the first non Taiwanese-owned overseas enterprise to make its primary listing on the local exchange. According to the TWSE, another 39 companies have submitted applications for primary listings in Taiwan, 25 of which are Taiwanese-owned holding companies operating in mainland China.
Japanese companies are also looking to the TWSE for international IPO and secondary listing opportunities. According to Schive, several Japanese companies that had planned to go public on the exchange, but delayed doing so because of the Fukushima nuclear disaster in March 2011, are expected to make their listing this year. Later this year, Schive will make another visit to Japan to court more companies considering IPOs and secondary listings on the TWSE as part of an effort to create an international fundraising platform in Taiwan.
The TWSE Listed Companies Expo in November 2011. The bourse had 824 listed companies with a combined market capitalization of US$636 billion in January this year. (Photo Courtesy of Taiwan Stock Exchange)
Diversity and Scale
Meanwhile, the TWSE’s introduction of sales of international ETFs in August 2009 has helped the bourse grow in diversity and scale. Today, the TWSE offers 18 ETFs, four of which include selected stocks listed on exchanges in the cities of Hong Kong, neighboring Shenzhen and Shanghai. ETFs are popular with investors in markets worldwide, with their trade value accounting for 22.7 percent of all transactions on the New York Stock Exchange in the first half of 2011 and more than 10 percent on most European exchanges during that period. Schive would like to see the TWSE edge closer to its counterparts by increasing its ETF trade value from 0.7 percent in 2010 to 5 percent by 2014.
With the TWSE expanding its trade volume through an alphabet soup of TDRs, IPOs and ETFs, the exchange’s IT infrastructure now handles an average of more than 4 million transactions a day, with transaction information updated every 20 seconds. The bourse is currently upgrading its system to keep up as transactions increase in number and speed. The new system is expected to come online by the end of this year and is predicted to be 10 times as fast as the current one, with updates coming as transactions are made.
In addition, the TWSE has worked to link up with the global network of exchanges by signing memorandums of understanding with 28 major stock bourses worldwide. These MOUs serve to facilitate information exchanges between the TWSE and its counterparts. “Prompt information exchanges are important,” Schive says, pointing to a hypothetical example of a company that has made a primary listing on the Hong Kong Stock Exchange and a secondary listing in Taiwan. If that company were delisted on the Hong Kong bourse, he says, the TWSE would have to be notified so that it could instantly suspend the trading of the company’s shares in Taiwan.
“Exchanges across Asia agree that greater collaboration is the best way to boost trading volumes and growth,” Schive said during a mid-November 2011 seminar, another event in the series of activities marking the TWSE’s 50th anniversary. More than 300 Taiwanese and international experts as well as global stock exchange leaders took part in the seminar. “The TWSE is actively pursuing alliances with trading platforms in Asia and around the world in order to underscore our commitment to future growth, while continuing to act as a hub for high-tech and high-growth companies to raise capital in Asia,” he said. Given the TWSE’s growth, development of new investment products and active opening to investors around the world, there is good reason to anticipate more milestones and breakthroughs in the exchange’s next 50 years.
Write to Oscar Chung at oscar@mail.gio.gov.tw