Lifting the economy through the financial sector

  • Date: 2016-09-23

I. Introduction

Over the past few years, Taiwan’s productivity has been hampered by numerous external factors including a slow recovery in the world’s major economies, uncertainty over a U.S. interest rate hike, contagion and volatility in international equity markets, and dramatic fluctuations in exchange rates. Domestically, a rapidly aging population is driving up the dependency ratio, while excess savings have climbed steadily from NT$910 billion (US$28.0 billion) in 2006 to NT$2.52 trillion (US$79.0 billion) in 2015. These trends reflect a need to more effectively channel capital into real production activities. The government has thus made directing capital into real production activities and expanding domestic investment a high priority.

To foster a mutually prosperous relationship between the financial sector and the real economy, the government’s financial policy is designed to strengthen financial supervision while concurrently supporting industrial growth. To enable Taiwan to respond to changes in the economic environment in a timely manner, the Financial Supervisory Commission on September 1, 2016 proposed a program that aims to lift the real economy through the financial sector. Three types of financial and professional resources will be used to support four areas of the economy, and ultimately build an environment that is conducive to industrial growth, innovation and job creation.

 

II. What are the three resources and four areas?

The program’s objective is to channel funding and resources into Taiwan’s domestic industries to help young entrepreneurs, encourage innovative businesses and boost employment. The three resources—capital funding, financial knowledge and practical assistance—are used to support four areas: industrial growth, entrepreneurialism, innovation and job creation. Strengthening the mutually beneficial relationship between the financial sector and the economy will empower Taiwan to pursue a new economic model for sustainable development based on the core values of innovation, employment and equitable distribution.

 

III. Three resources to support four areas

The program provides capital funding, financial knowledge and practical assistance to transform industries and create jobs for the local economy, with a view to maintaining steady growth of the financial system:

A. Capital—Multiple forms of funding assistance

1. Promote investment

(1) Banks, insurers and securities firms are encouraged to donate to an entrepreneurship fund and an angel fund established under the program. They are also encouraged to invest in startups, particularly those in fields targeted for priority development.

(2) To accelerate capital investment in infrastructure industries, the government has raised the ceiling on investments in developmental real estate by private real estate investment trusts. Rules for issuing asset-backed securities have also been eased on infrastructure projects that qualify for private investment.

(3) Businesses that insurance companies may invest in have been expanded to include venture capital firms created under the Limited Partnership Act as well as cultural and creative industries. The maximum allowable direct investment by an insurer in a single venture capital firm has been raised to NT$200 million (US$6.4 million), with no advance application required.

 

2. Provide financing

(1) To encourage bank loans to businesses in priority fields, the Ministry of Economic Affairs has instructed the Small and Medium Enterprise Credit Guarantee Fund to increase the maximum guarantee coverage for such businesses from 80 to 90 percent.

(2) To entice banks to take on high-risk loans to fledgling companies or small and medium-sized enterprises, the government is allowing banks to share in the company’s future profits (excluding stock options) using a “carried interest” provision.
 

3. Develop e-commerce models

(1) Expand creative uses of mobile payment applications, raise the penetration rate of mobile payment terminals among local merchants, and create convenient mobile payment services. Develop a comprehensive equity-based crowdfunding platform, encourage innovation, and provide fundraising channels for microenterprises.

(2) Encourage insurers to employ financial technology and big data applications to develop innovative products—health management insurance policies that provide spillover benefits, for instance.

 

B. Knowledge—Financial consultation and assistance

1. Financial consultation: To improve companies’ chances of building a successful business, the Taiwan Academy of Banking and Finance and senior finance personnel have established an entrepreneurial guidance platform to provide basic financial consultation for new startups. Banks are also encouraged to set up financial consultation windows for related industries.

2. Industrial research and market analysis: Big data applications will be created to help companies and business owners stay on top of the latest industrial developments, market trends, marketing applications and risk management issues.

 

C. Practical assistance—Software and hardware

1. “Soft” ware: Utilize human resources to build a platform of financial professionals, plan industry-university cooperation projects, and encourage listed and over-the-counter companies (including financial firms) to offer college students internships or job offers upon graduation.

2. “Hard” ware:  Deploy the Financial Technology Development Fund set up by the Taiwan Financial Services Roundtable to expand cooperation between financial technology bases and the nation’s startup parks, incubation centers and financial institutions, as well as provide exchange opportunities among entrepreneurs.

 

IV. Financial tax issues

A. Recommend suspending securities transaction taxes on corporate bonds and financial bonds for 10 more years.

B. Recommend suspending securities transaction taxes on bond exchange traded funds on the local main board and the over-the-counter market for 10 years.

C. Allow mainland area investors and mainland-funded investment firms in Taiwan to invest in funds and foreign currency bonds in Taiwan:

1. These reforms are not related to the cross-strait trade in goods and services pacts:

(1) Different investment sources: This policy targets mainland investors who work and own assets outside of China. Because their investment funds are held offshore, they do not require approval from China’s State Administration of Foreign Exchange to transfer funds. These investors are not related to the mainland area qualified domestic institutional investors as specified in the cross-strait trade in goods and services agreements.

(2) Different investment targets: Since the policy only permits investment in funds and foreign currency bonds—and not stocks—there is no concern that a mainland area investor will gain control of a Taiwan company.

2. No mainland area investor will be able to gain control of a Taiwan business:

This policy permits investment by mainland area investors in funds and foreign currency bonds, but not in stocks conferring controlling rights. And since the funds will be managed by local investment trust / futures trust firms, Taiwan companies will not be at risk of coming under the control of mainland investors.

3. The Taiwan market will not be influenced by mainland regulators:

The mainland area funds for these investments in Taiwan are offshore assets, and therefore not subject to the control of mainland regulators. Investment amounts have also been capped and will not influence Taiwan’s securities market. This limited market opening to financial investments can spur Taiwan’s fund industry and capital markets in a way that effectively manages risks while protecting businesses from mainland control and ensuring national security. The government’s position on cross-strait economic interaction is to manage risks carefully and proceed in a gradual, orderly manner that will not influence Taiwan’s economic, political and social stability.

 

V. Conclusion

Given the importance of the financial sector to the overall economy, Taiwan must keep its financial policies in step with changes in the economic environment. To maintain steady growth in the financial system, the government will use its financial assets and resources to boost industrial development, creating a win-win situation for the financial sector and other industries. This program to leverage the financial sector to lift the overall economy will channel capital into priority fields, promote industrial growth, help young business owners, encourage innovation and create jobs. All of these goals are part of the president’s vision to create a new economic model for sustainable development based on the core values of innovation, employment and equitable distribution.