Taiwan: Relaxed regulation

Wednesday, July 9

On June 26, Taiwan's Financial Supervisory Commission (FSC) announced a new round of relaxed financial rules between Taiwan and China. Taiwanese businesses are to be allowed to expand their investments in China, and the door is being opened to Chinese capital through corporate mergers and acquisitions.  In line with Taiwanese President Ma Ying-jeou's planned liberalisation of economic relations, the cabinet has passed five measures to relax investment restrictions with China. They are:

• the abolition of a regulation that requires proof that capital put into local securities and futures markets by foreign institutional investors does not come from China;

• the opening of mutual listings of Exchanged Traded Funds (ETF) on the Taiwan and Hong Kong stock markets;

• allowing companies listed on the Hong Kong Stock Exchange to raise second listings on Taiwan's stock market or issue Taiwan Depository Receipts (TDRs);

• allowing local securities investment trust firms to invest in China or purchase shares of China's investment funds management companies, and allowing local futures firms to invest in China's counterparts directly or indirectly; and

• cancelling rules that allow offshore funds to invest a certain ratio in Chinese shares as well as Hong Kong/Macao H and red chip shares.

TAIEX timing. The new relaxation in financial policies is in response to the falling stock exchange (the TAIEX), which fell 12 per cent in the month since Ma's inauguration in May. By easing cross-Strait investment restrictions, Taipei hopes to increase the competitiveness of the Taiwanese stock market and to attract more foreign investment into it.

Next step. While the domestic financial sector has largely welcomed the government's move, some contentious restrictions remain. An investment ceiling of 40 per cent into China stays for now, though is due for at least partial review by the end of July. Under existing rules, only conditional Taiwanese investments are allowed into Chinese silicon wafer plants, and investment in Chinese infrastructure projects is forbidden. The ministry will re-examine such restrictions, as well as re-drafting rules governing capital investments in Taiwan by Chinese enterprises.

While there is a clear political context to the move to liberalise exchanges across the Taiwan Strait, last month's move is also an attempt to promote and internationalise Taiwan's capital market. To this end, it is an inadequate step: the arcane laws and regulation regarding investments in and with China, for example, need to be further liberalised if Taiwan is to stay competitive in the regional and global financial market.