On June 26, Taiwan's Financial Supervisory Commission (FSC) announced a new round of relaxed financial policies 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 Taiwan President Ma Ying-jeou's planned liberalisation of economic relations, the Executive Yuan (cabinet) has passed five measures to relax investment restrictions with China.
· 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, when registering with the Taiwan Stock Exchange Corp (TSEC);
· opening 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), in a bid to attract Taiwanese capital back;
· 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
· canceling rules that allow offshore funds to invest a certain ratio in Chinese shares as well as Hong Kong/Macao H and red chip shares, the precise content of this rule to be determined soon.
TAIEX timing. The new relaxation in financial policies may have been prompted in part by concerns about the falling TAIEX, which shed some 12% in value over the one-month period since Ma's inauguration on May 20. By easing cross-Strait investment restrictions, Taipei hopes to increase the competitiveness of the Taiwanese stock market and to attract more foreign investment into the TAIEX.
Next step. While the government's move has been largely welcomed by the financial industry, one of the most contentious restrictions, the investment ceiling of 40% into China, is still to be addressed. The Ministry of Economic Affairs says it will revise the current ceilings on capital investment in China on local businesses based on their net asset value before end-July. Under existing rules, Taiwanese companies are not allowed to invest in infrastructure projects in China. Furthermore, only conditional Taiwanese investments in silicon wafer plants are allowed in China. The ministry will re-examine the criteria and restrictions over these specific business or industrial lines, as well as 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 part of policy that has seen a series of reform measures introduced by Taipei in an attempt to promote and to internationalise Taiwan's capital market. However, the small step-approach does not go far enough to meet the needs of the financial sector. The arcane laws and regulation regarding investments in and with China, for example, needed to be further liberalised if Taiwan were to stay competitive in the regional and global financial market.