Taiwan Today

A loosening of regulatory measures is drawing more foreign investors to the Taiwan Stock Exchange.

As Taiwan rang in the New Year from Taipei 101, the world's tallest building and future home of the Taiwan Stock Exchange (TSE), foreign investment had reached a milestone, surpassing 30 percent of the value of Taiwan's stock market. This capped two years of aggressive government efforts to integrate with the world's financial markets by bringing more overseas money into the local bourse and strengthened Taipei's bid to become a regional financial center. "In the past, Taiwan had a radically different capital market regulatory regime that made it difficult and risky for foreign institutions to invest here," says Peter Kurz, managing director and head of corporate finance for French bank BNP Paribas, Taiwan.

Now there is an active policy to integrate Taiwan's capital markets into the world capital market. Measures have included the elimination of major restrictions on foreign investors in Taiwan's securities markets and the creation of the Cabinet-level Financial Supervisory Commission (FSC) that is tasked with accelerating market liberalization and internationalization.

At the end of 2003, stiff qualification requirements for foreign investors were dismantled in favor of a simple registration process, signaling that Taiwan was serious about reform. As a result, the Morgan Stanley Capital Index, an international bench mark index followed by many of the world's institutional investors, increased its weighting of Taiwan. "If you double Taiwan's weighting in this benchmark, you're effectively doubling the amount of foreign capital coming into Taiwan's stock market," Kurz points out.

The establishment of the FSC in mid-2004 replaced overlapping supervisory systems, and it became the sole financial regulator for the banking, securities, futures and insurance industries. It has also shaped a more investor-friendly environment. "The FSC came in and was charged not only with supervising, but it also had a political mandate to upgrade and integrate with the international capital markets," Kurz says. "There was a sea change in attitude and regulators went from saying 'No' to saying 'Yes' to developing the capital markets."

There were many benefits to lifting restrictions and getting in line with international practice. "We attract more foreign investment, and there are more products, which enhances our liquidity and lowers our cost of funding for listed companies," explains Kong Jaw-sheng, chairman of the FSC. "We are also recognized as an advanced market, since foreign investors won't invest in poor markets. Plus our listed companies pay more attention to corporate governance and transparency."

The major drawback to opening up to the global economy is that the government forfeits some leverage over the domestic economy, which is now subject to huge amounts of capital that can move in and out at the touch of a computer key. "Foreign institutional investors are very good at financial analysis, industry development and corporate outlook," says Kong. "If there is an economic downturn, then we have to think about how to maintain financial stability and our foreign exchange."

The FSC's approach to liberalizing and advancing Taiwan's financial system is comprehensive in scope. In the past year, the FSC has overhauled the Initial Public Offering underwriting system, pushed hard to encourage full disclosure and corporate governance, focused on the protection of consumer investors and promoted financial education. To counter insider trading, the FSC has established rules for a fair game with a revised Securities and Exchange Act. Clamping down on financial crime is also a priority. "We work closely with the Ministry of Justice, which has sent a special prosecutor to work with us," says Kong.

The FSC is also intent on developing the financial industry, which is a major employer in the United States, Europe and other advanced economies. "The service industry accounts for 70 percent of our GDP," Kong points out. "We understand that the financial industry is the flagship of the service industry. Previously the government considered the financial industry as just a party-supporter that could help with efficient growth." The change is an important factor for investors. "Now the government doesn't look at financial institutions as simply a support to industry, but rather as an industry in itself," says Peter Kurz of BNP Paribas.

With market liberalization, Taiwan's listed companies are anticipating greater demand for their shares. Companies that have already adopted investor-friendly policies have become particularly attractive to foreign investors. Foreign investors already hold 65 percent of the shares of Taiwan's Delta Electronics, the world's largest maker of power supplies, one of the highest percentages on the TSE. "Our philosophy for dealing with investors is to be a responsible corporate citizen," explains Yancey Hai, chief executive officer of Delta Electronics. "First, we need to provide accurate and up-to-date information to the general public transparently, which means systematic and non-preferential delivery of information. Second, we provide a true picture of what's going on with consolidated numbers for all our operations, not just Taiwan, which are reviewed by certified public accountants. We were one of the first companies in Taiwan to do this."

An effective investor-relations (IR) program has become a priority for many companies listed on the TSE. "Companies that have significant foreign investment all have an IR department, the same as other global companies," says Kong.

Delta Electronics has a full-time IR officer whose primary job is communicating with investors. This requires that he participate in investor conferences around the globe more than 10 times a year. Delta's CEO Yancey Hai also spends up to 10 percent of his time communicating with investors, including three or four meetings a year in Asia, Europe and the United States. "The meetings are for investors to understand what's going on and if there is anything new at Delta, such as a new product or new technology," says Hai. "They want to know what our plans are. Of course I can't tell them I'm going to make X dollars next year, but we deliver information that is pretty reliable."

Taiwan's stock market was at one time dominated by retail investors, known locally as "vegetable basket" investors--housewives that buy stocks at their brokerage on their way to the vegetable market and then sell them on their way home. But since the stock market bubble of the late 1980s and subsequent market surges, retail investors have been discouraged by a market that is difficult to make money in. "Retail investors have been reluctant to come back in," says Kurz, "and there has been a sharp drop in the volatility of the market. Risk levels have come down considerably."

Opening the market to foreign institutional investors is bringing stability as they hold an increasingly larger proportion of the market's value. "We like institutional, long-term investors. They understand what your strategies are, what your plans are and how you will deliver," says Hai. However, it does not matter if they are international or domestic. "Actually, local pension funds are big stock holders of Delta. Local insurance companies, pension companies, trust companies, as long as they are institutional they are all welcome."

The two major reasons foreign institutions invest in the TSE are that Taiwanese companies pay good dividends and also offer high growth potential. The payout of dividends signals that a company's management has confidence in its future prospects and its ability to sustain regular dividend payments. Dividends are also a sign that a company is attentive to shareholder value by paying out excess cash, which is a way of demonstrating good corporate governance. "If there is one significant change to the stock market, it's that companies in Taiwan never used to pay out cash dividends," says Kurz. "Now they pay out very generous cash dividends. That's a very positive factor."

Delta Electronics has provided an average dividend yield of 5 percent over the past few years. Foreign investors are often surprised since they are accustomed to a dividend payout only from mature companies that have stopped growing, such as utilities or railroads. "Our dividends are very stable, plus we have a good 20 to 30 percent growth per year," says Hai. "A lot of investors, especially the big pensions and the insurance companies, like that. For Delta it is a double play, in addition to dividends, investors enjoy stock price appreciation."

High growth potential is the other reason foreign institutions invest in companies listed on the TSE. Over the past decade, many Taiwanese companies have established a large production capacity in less expensive areas of the region. Although their factories are overseas, the order-taking, R&D, financing and after-sales service are all in Taiwan. Describing why buyers prefer doing business in Taiwan compared with other East Asian nations, Kurz states, "Taiwan has a superior soft infrastructure, legal system, IPR protection, judicial system, education system and financial system. So it's best to keep the contract and the contractual relationship here."

Of all areas in the region, China is attracting the attention of foreign institutional investors because of its growth potential. Yet there are also many risks involved. Because Taiwan's companies have unmatched cultural advantages and access, institutional investors would rather hire a Taiwanese company as their proxy in China. Kurz argues that entering the Chinese market through Taiwan minimizes risk for foreign investors. "I interface with a Taiwanese company in Taiwan, under Taiwanese law, through Taiwanese capital markets, and they do the heavy lifting for me," he says.

In line with liberalizing and internationalizing Taiwan's capital markets, the FSC has set a goal to make Taiwan a regional fund-raising and asset-management center. Taiwan has several advantages compared with other countries in the region. Economic development in Taiwan stems from many small and medium-size companies that have since internationalized and created a strong, globalized manufacturing base. "Korea and Japan have chaebols, big conglomerates that are not very proactive, flexible or entrepreneurial, and Hong Kong and Singapore do not have a domestic base," says Kong Jaw-sheng.

Other advantages include Taiwan's huge foreign reserves and negligible external debt, substantial private wealth, well-trained human resources and well-established institutions. "We want to strengthen the competitiveness of our financial services industry and become a regional financial service center," Kong emphasizes.

This year, the FSC is planning to establish an international bourse under the TSE. The international bourse will provide a capital market, including a bond market, fixed income and futures, with shares traded in US dollars to minimize exchange-rate risk. The objective of the new bourse is to make Taiwan a platform for financial operations that will enhance Taiwan's ability to act as a gateway to China and Southeast Asian countries. The trading and practices of the international bourse will follow international practices and accounting principles. "All foreign investors are welcome, and all money in the international bourse will be free to come and go," says Kong.

As Taiwan restructures and opens its financial industry, foreign investors will find more opportunities to benefit from the region's growth. "In the context of Asia, Taiwan has been the underperformer, cheap relative to its historical trends," says Kurz. "So within the region, Taiwan actually may be the best play."

Copyright (c) 2006 by Butler Waugh.