The unstoppable momentum of interaction between Taiwan’s and mainland China’s financial institutions presages dramatic changes in the cross-strait financial ecology.
Following agreements reached through the third meeting between Financial Supervisory Commission and China Banking Regulatory Commission , there are reasons for both optimism and pessimism in Taiwan’s financial community. Although local banks now have opportunities to project their operations into the mainland Chinese market, they might not be able to reap commensurate rewards, given their relatively small scales of operation in comparison with mainland Chinese competitors.
In response to the redundancy of services offered by an excessive number of small-scale domestic banks, there have been persistent, loud calls among Taiwan bankers for timely government measures that will facilitate the formation of large-scale, internationally competitive financial institutions.
If mergers of Taiwan’s financial businesses are delayed, benefits accruing from access to the mainland Chinese market will be very limited. To boost the competitiveness of Taiwan banks, the government must swiftly push forward with a new round of financial-sector consolidation.
In view of the fact that over 50 percent of Taiwan’s banking market is controlled by eight state-run institutions, the government plays an important role in financial-sector consolidation and enlargement of banks’ scales of operation. The Ministry of Finance should loosen its grip on state-run banks and let the private sector take over.
The proceeds from sales of these banks’ share premium might then be invested in sorely underfunded public infrastructure programs, breaking through central and local governments’ fiscal bottlenecks. Governmental inaction in this regard will have worse consequences than corruption, becoming the biggest barrier to economic development.
Taiwan’s initial wave of mergers of financial institutions was launched during the second term of former President Chen Shui-bian. Mergers completed by 2005 included those of Cathay United Bank and World Chinese Commercial Bank, Chinatrust Commercial Bank and Grand Commercial Bank, Taipei Bank and Fubon Bank, and Macoto Bank and Shing Kong Commercial Bank.
The mergers have fulfilled their goals, enabling the merged banks’ holding companies to reduce business costs while enhancing their operational efficiency, as well as their ability to bring out new financial products and to expand their operation network.
In the first wave of mergers, only that of Taishin International Bank and Chang Hwa Commercial Bank has been stymied. This failure runs contrary to the government’s stated policy of encouraging mergers and has become a psychological barrier to pressing forward with further financial reform.
In contrast with the rapid pace of expanding interaction between financial institutions in Taiwan and mainland China, since the second wave of financial reform, Taiwan’s financial-sector re-engineering has proceeded at a laggardly pace due to political qualms and indecisiveness.
At this time, when possibilities for cross-strait share swaps, mergers and acquisitions are maturing, government efforts to do whatever possible to facilitate financial reform should be a matter of top priority.
In view of the reality that Taiwan banks are unable to match mainland Chinese banks in terms of either scale of operation or potential for profitability, it is essential for the government, at this pivotal juncture, to provide leadership.
Unfortunately, governing party and opposition party politicians, as well as public and private financial institutions, have so far been unable to reach a consensus concerning strategies for ongoing financial-sector consolidation. The top managers of state-run banks have also expressed divergent views on how it should proceed.
In order to facilitate financial institution mergers and acquisitions, therefore, the government must establish a task force dedicated to advancing that goal. After receiving scholars associated with the Academy of Promoting Economic Legislation, President Ma Ying-jeou directed the Executive Yuan to assess the advisability of establishing such a task force, once again putting the issue of financial reform in the spotlight.
With the operations of Taiwan and mainland Chinese financial institutions becoming ever more tightly intertwined, it is apparent that excessive restrictions imposed on state-controlled banks—commanding half of the banking industry’s assets—make it impossible for Taiwan banks to bring to bear their advantages in the mainland Chinese market.
The government needs only a single 100-percent state-owned bank or financial holding company to advance its policies. The remaining semi-privatized institutions in which the government holds controlling shares must speed up the process of releasing their state-owned shares and achieving thorough privatization.
To avert a replay of the shortcomings that marred the second wave of financial reform, and to enable the government to obtain the greatest possible return from privatization, the government must ensure that the share-releasing process is open and transparent.
Private investors in the financial industry will, for their part, receive the highest returns for their investments thanks to the enhanced business efficiency resulting from complete privatization. By purchasing the released state-owned shares, private financial institutions operations can greatly expand their operation scales and market share. Such expansion through mergers will leave the bulk of Taiwan’s banking assets under the control of the private sector, thus reinforcing the capability of Taiwan banks to compete in the mainland Chinese market.
In the course of ongoing financial reform, the government should respect the spirit of corporate governance. It should not interfere in the making of management decisions by privatized financial institutions in which it still holds a share. And it must not upset or stand in the way of the normal functioning of market mechanisms.
The Executive Yuan would do well to immediately establish a cross-ministerial task force dedicated to furthering financial reform. At this historic juncture in the development of Taiwan’s financial community, the administration of President Ma must, during the remaining three years of his tenure, quickly formulate a blueprint for bolstering the competitiveness of the nation’s financial sector.
(This commentary originally appeared in the Economic Daily News, July 25)