In seeking status as a bona fide domestic hub for Asian funds, including trying to grab a share of China’s lucrative investor base, Taiwan believes the introduction of recent capital market reforms such as overhauling its trading and settlement system will provide a timely tonic just as capital markets worldwide reassess their own functionalities.
So far, the market trends are healthy for a country only 80 miles from mainland China and separated by the Taiwan Strait.
Restrictions on domestic investing in China have been lifted this year, including the removal of a 40 per cent investment cap and relaxing restrictions on fund transfers and remittances. Investments can now be made in Chinese stocks via exchange traded funds (ETFs) and significantly, barriers to capital inflows from the mainland have been lifted. This includes permission for Chinese funds to invest in manufacturing, real estate and real estate investment trusts (Reits) and the cross-listing of ETFs and Taiwan depositary receipts (TDRs). The government is also expected to offer tax breaks for domestic investors who transfer overseas-based savings back to Taiwan.
“Our capital market is in better shape now than in the 1990s, when we slumped from 14th to 20th in our total share of fund flows,” reflects Dr Chi Schive, chairman of the Taiwan Stock Exchange (TWSE), who has overseen something of a return to form for the local bourse in his first year in the office.
For instance, through changes to inheritance tax, cut from a prohibitive 50 per cent to a uniform 10 per cent, Dr Schive says more Taiwan companies based in China “are now coming home for good”.
Ju Teng, which makes notebook computer casings, and Want Want, a food manufacturer, were the first to list on the TWSE in the spring. In fact, 19 Taiwanese companies originally based in China, Hong Kong and Singapore are seeking IPOs and two are considering secondary listing through TDRs on the TWSE this year. Another 15 IPOs are expected next year with around six TDRs also due.
“We are hoping that 2010 will see newly listed companies from abroad outnumber domestic listings for the first time, and we certainly encourage Korean and Japanese companies to dual list here,” says Dr Schive. “The market is responding positively and suddenly we realise we can now attract overseas funds to the exchange”.
The number of funds being redirected across the Taiwan Strait and into Taipei also delights TWSE’s chairman - around $15bn (TWD490bn, €10.2bn) of foreign fund flows “have returned” this year. “We want to build up Taiwan as a funds centre and also as a wealth management hub,” he adds. “While the Taiwanese are rich, nowadays our Chinese brothers are richer.”
QDII expansion
In recent months there have been a number of market reforms that have helped to boost liquidity in the domestic exchange, develop a sophisticated product line (including extending the futures and options range, new structured products and ETFs), and broaden the investor base, both in the institutional and retail space.
According to Rosemary Wang, deputy director-general of the securities and futures bureau at the Financial Supervisory Commission (FSC), the industry regulator, establishing Taiwan as an asset management centre in Asia requires the right products and vehicles to attract overseas investors, especially Chinese funds. “We need more options for (these) funds and diversified sources for raising capital here,” she says.
In April, the FSC granted permission to mainland qualified domestic institutional investors (QDII) to invest in securities, fixed income and conduct futures trading in Taiwan. Under the existing agreement being negotiated by regulators on the mainland and in Taipei, QDII funds can launch $900m in Taiwan investments. Ms Wang adds: “Though allocations from QDII represent a small amount of total liquidity, it serves as an important milestone for future Chinese investment. Inflows of capital from these investors are expected to expand in the longer term, as QDII investors become more familiar with opportunities in Taiwan.”
China is considering increasing the cap on QDII investment in Ms Wang’s country from 3 per cent to 10 per cent in the near future, according to FSC research.
Future’s bright – Taifex
In the first quarter of this year, the Taiwan Futures Exchange (Taifex) made bold moves to further capital market efficiencies within its derivatives bourse. “We have become a modern exchange in a very short time,” believes its vice president Peter Chiu.
Taifex looked to reduce the risks for global investors trading Taiwanese futures though measures like tax credits and an extension of the trading window so most US and European hours would be covered.
