TSEC seeks capital market reforms

Wu Rong-i, chairman of the Taiwan Stock Exchange Corp., discussed developments in Taiwan's capital markets at the American Chamber of Commerce luncheon held at Shangrila Far Eastern Plaza Hotel in Taipei yesterday. Wu said he wants to push integration of Taiwan's exchanges and reform the TSEC.

"We need to keep up with trends in global exchanges, namely demutualization, IPOs and strategic alliances," Wu said. "Of the top 20 stock exchanges, 12 have gone IPO, and exchanges like TSE and KRX (Korea) have been planning them." Taiwan's stock exchange, he observed, ranked 21st in terms of market capitalization.

Mergers and acquisitions of stock exchanges have also escalated both in terms of volume and valuation. "In 2004, the value of such activity was merely US$200 million. In 2007, to date, it is US$19.6 billion," he said.

"All of the public North American stock exchanges have been involved in strategic activity over the past 18 months," he continued. The same thing is happening in Europe. "Strategic activity in Asia is taking longer to evolve," stressed Wu, "with minority investments and alliances more prevalent than outright acquisitions."

He touched upon a proposed "Four-in-One" integration framework. In Phase I, the Taiwan Stock Exchange (TSEC), Taiwan Futures Exchange (TAIFEX), Gre-Tai Securities Market (GTSM) and Taiwan Depository & Clearing Corp. (TDCC) are to be transformed into subsidiaries of a new holding company (TWX Holdings) through a share swap.

"We want to enlarge the market scale so that it becomes an attractive market with regional characteristics. We also seek to meet international competition by following global practices through cross-border cooperation or strategic alliances," noted Wu.

To strengthen market supervision, Wu wants to restructure the Gre-Tai securities market. "The GTSM will be merged with the Securities and Futures Institute (SFI). Alternatively, it will be transformed into a market think tank that donates periodically to the SFI for research expenditures."

The GTSM is currently a non-profit organization, he explained. "This will be spun off to establish the Gre-Tai Corp., which will be a shareholder of TWX Holdings through a share swap. Cash dividends from the TWX will be injected into the GTSM operational expenditures of the market think tank to enhance research on capital markets and promote international competitiveness."

"An organization will be set up to enforce day-to-day market supervision before the listing of TWX Holdings."

"Having a specific institution responsible for clearing will facilitate flow of funds and thereby benefit securities firms, futures firms and investors," continued Wu. "Integration of trading and clearing systems on a common platform will also improve services and reduce access cost of market participants.

By jointly monitoring market risk and cross-market information, we can effectively prevent illegal events and upgrade market operational safety, while ensuring the independence of market oversight and supervising efficiency."

Reform is very much needed, said Wu. "While the number of listed companies at TSEC and GTMS went from 518 in 1997 to about 1,259 in 2007, we have not kept pace with other exchanges. In terms of market capitalization and value of share trading, Taiwan's exchange went from 14th in 2003 to 21st in 2007. In addition, the number of newly listed companies has been decreasing."

Increasingly, he added, Taiwanese companies are seeking to list overseas. Another worrying trend can be seen with regard to flows of portfolio investments. The net outflow in 2006, he explained, was up substantially to US$19 billion.

Despite these challenges, Wu believes Taiwan has many advantages. "We have a relatively good profit-earnings ratio. In September 2007, the P/E of Taiwan stocks was 19.51. Compare this with Tokyo at 30.4, Hong Kong 22.3, Korea 16.99 and Singapore 16.25."

Taiwan has a high velocity when it comes to share turnover, the ratio between domestic share turnover and their market capitalization. The level of shareholding and trading among foreigners is also quite high. "Foreigners held US$246.9 billion worth of Taiwan's stocks at the end of October 2007 or 33.57 percent of total market capitalization," said Wu. "Moreover, total trading value by foreigners was US$161.2 billion at the end of October, and in 2007, they accounted for 19 percent of total value traded."

Excellent yields and generous distribution of dividends are another advantage. "In 2006, Taiwan yields were at 4.2, Singapore 3.5, Korea 1.7, Hong Kong 2.2 and Tokyo 1.1."

Wu sees Taiwan's exchange as presenting excellent potential. "Earnings growth at the top 10 industries in Taiwan (Q1-Q3, 2007 year-on-year before taxes) was very high," said Wu. "Taiwan has many other attractive qualities as well," namely, massive insurance and pension funds. "The wealth of the rich in Taiwan ranks third in Asia, next only to Japan and China. In 2005, more than 210,000 households in Taiwan held assets of more than US$1 million; total domestic and offshore assets amounted to US$585 billion."

Other advantages are the island's high-tech, China-savvy talent, expertise in high-tech development, cluster of world-leading technology companies and long-term relations with the U.S., Japan, China and Southeast Asia.