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198 Taiwan Development Perspectives 2009 the industry sectors other than financial institutions, and the general public). Take Taiwan for example. Its official foreign exchange reserves have reached US$280 billion, against the US$420 billion in private foreign exchange assets. The Central Bank keeps the foreign exchange reserves primarily in U.S. bonds and bank deposits, while private investors hold overseas funds, bonds and derivatives as foreign exchange assets. For Taiwan, the financial tsunami has significant influences on private-owned foreign exchange assets, while the impact on the foreign exchange reserves held by the Central Bank is comparatively small. The impact on the private sector would have possibly been lower, if Taiwan’s financing industry has internationally competitive expertise to provide highly value-added products for them. What are the financial tsunami’s implications for to Taiwan’s strategy to turn itself into a cross-strait regional financial center? For one thing, it has a significant implication for financial supervision. As even in the countries with more mature supervisory practices than Taiwan, such like the United States and the United Kingdom, large-scaled market failures might still happen, both external supervision and internal risk management of the financial institutions are critical issues to be considered while we are mapping up the strategy for developing Taiwan into a cross-Strait regional financial center. For another, the crisis tells Taiwan of the importance of cultivating internationally competitive talents. Financing professionals in Taiwan are generally not good enough at communication in foreign languages. What these professionals have to do to do business worldwide is to improve their cross-cultural communication ability through systematic training. On the other hand, as a result of the financial crisis, tens of thousands of Wall Street professionals have been laid off. They are seeking new career opportunities. It is time to get some of them to Taiwan to train our professionals and help establishment our regional financial center. Still another implication is that the current turbulences in global financial markets make more and more domestic investors withdraw offshore investments, and shift their capital back to Taiwan. To establish Taiwan as a regional hub of international financing, we have to consider offering internationally competitive incentives for the overseas Chinese (such as attractive tax exemptions), which could at least compare favorably with Hong Kong and Singapore, to encourage a capital backflow. The amendments to relevant laws will facilitate the development of financial modernization. The laws which are subject to amendment include Overseas Banking Unit Act, Securities and Exchange Law, Foreign Exchange Control Act, Business Tax Act, Income Tax Act, Trust Business Act, and Securities Investment Trust and Consulting Act. Moreover, the financial tsunami teaches Taiwan to encourage domestic investors to invest in local mutual funds. Continuing to promote the internationalization of capital market and enhancing the diversity of financial products will be important to make the domestic investors willing to stay in local markets rather than shift capital aboard looking for promising investments. Besides, there are several essential aspects to be considered while we are heading for our vision of becoming a world-class fund raising center, such as providing diversified hedging instruments, expanding foreign participation in local future markets to enhance Taiwan’s competitiveness and developing cross-strait exchange rate futures to counteract the potential risks for the NTD exchange rate policy. On the other hand, the crisis has made us aware of the importance of encouraging the issuance of overseas mutual funds in Taiwan. In Taiwan, the investments in financial products are taxed on various types of distributions and capital gains, including dividends, interest, income from transactions, and insurance payment. Currently, Taiwan’s taxation system has introduced some preferential regulations, such as exemptions of tax on security trading income, futures trading income, overseas income, insurance payments and the favorable separate tax rate of 6 percent for securitization transac-
Strategies for Cross-Strait Financial Exchange and Cooperation under Financial Tsunami 199 tions. The galloping development of financial innovations and the acceleration of capital outflows from domestic markets, however, have evoked reflections on the facts that the current taxation system for financial products cannot cope with the international benchmarks; and inconsistencies amongst the tax rates for similar products are quite common. Such flaws in taxation have not only adversely affected the developments of financial innovations and market liquidity, but have also caused unfair competition among financial institutions, which might eventually be harmful to the development of the capital market in terms of international competition. The rapid growth of financial innovations has singled out the importance of modernizing the current taxation system. For example, tax regulations for certain types of financial products are inadequate, and are not up to the international standards. Besides, the inconsistencies amongst taxations on similar products have made adverse impacts on the fairness of market competition. To help financial institutions enhance their international competitiveness, current tax regulations should be comprehensively reviewed against the international benchmarks for improvement of fairness and structure consistency. Last but not lease, it is necessary to deregulate the market for financial innovations. We shall add more variety to the existing pool of ETF. Currently, the underlying index of ETF in Taiwan is none but the Taiwan Stock Exchange Index. As a consequence, we shall be able to find huge opportunities for brilliant ETF innovations, if the underlying assets of ETF are extended to international indexes. Furthermore, fund management policy should be consistent for offshore as well as domestic funds. Variances between the regulatory mandates for offshore and domestic funds are distinct in many aspects and shall be adequately eliminated. For example, offshore funds are allowed to invest in China securities, H. stocks and Red Chips in Hong Kong and Macau, while domestic funds are not permitted to make similar investments. Besides, we shall consider following the UCITSIII established by the European Union and accomplish substantial deregulations on the trading activities of local investment trust corporations, or tightening the management policy on the EU funds to ensure both EU and domestic funds are regulated on an equivalent basis. The business scopes of discretionary investment services shall be further expanded. Due to over-regulations on the varieties and ratios of investment in derivatives as well as the unreasonable prohibition of investment in certain types of securities in China, Hong Kong and Macau, (such as H. stocks and Red Chips), the discretionary investment services have taken substantial risks of asset allocation inefficiencies. III. Prospects of Cross-Strait Financial Cooperation Under the consensus achieved at the Cross-Strait Economy and Trade Forum held on April 15, 2006, the financial institutions in Taiwan and China are encouraged to make joint efforts to structure a well-functioning supervisory system around cross-Strait financial issues and to launch cross-strait negotiations on a Comprehensive Economic Cooperation Agreement (CECA), which is similar to the Closer Economic Partnership Agreement (CEPA), for establishing a cross-strait financial supervision and monetary settlement system. According to mentioned by P. K. Chiang Pin-Kung, chairman of the Straits Exchange Foundation, the CECA and the CEPA are very different. The CECA is neither equal to a free trade agreement (FTA), nor the same as the CEPA signed between China and Hong Kong. The CECA aims at creating an exclusive model of economic and trade relations to facilitate the consensus building process across the Taiwan Strait on various critical issues, such as tax exemptions on 90 percent of exports, reductions of customs duty and investments thresholds.
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CONTENTS Preface Overview ix xi Foc
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Agriculture and Fisheries Impact of
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CHUANG, Yih-chyi( 莊奕琦 ) Pro
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TAN, Ching-yu( 譚瑾瑜 ) Associ
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enth effort on the part of the Foun
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ills pertinent to parliamentary ref
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