Taiwan's finance system: Not-so-crazy, rich and regulated
Over the last 30 years, Taiwan has become very wealthy – is that in spite of, or because of, the pariah island’s tightly restricted financial system? New finance minister, Su Jain-rong, gives Asiamoney his views.
Eclipsed by China and largely excluded from Asia’s grand economic discussion, Taiwan is easily overlooked.
Its superpower, mainland neighbour dominates the Greater China conversation, both threatening the island-nation and at the same time helping to enrich it. But while Taiwan is very much the lesser relation, it is hardly the poor one.
Yet over the 30 years that Asiamoney has tracked Taiwan, we have found much to admire about the Republic of China – the rest of Asia would do well to notice too.
Tiny Taiwan has, on the whole, delivered, and is a welcome antidote to the autocratic orthodoxy of the enormous China – as shown by its sympathetic response to the massive anti-extradition protests that took place in June in Hong Kong, the territory often cited as the test template for Beijing’s desire to absorb Taiwan.
Plus Taiwan is a genuine democracy – a rare thing in Asia – and generally boasts a competent civil service and accountable public institutions, save for its periodic and often spectacular public eruptions of corruption. Unusually for Asia, Taiwan is also socially progressive. Asiamoney speaks with the island’s technocratic and relatively new finance minister, Su Jain-rong, on the same day (May 24) that Taiwan legalizes same-sex marriage, the first nation in Asia to do so.
Nor has this been at the expense of Taiwan’s economic gain and security. Many Taiwanese proudly argue that their evolving liberalism has actually enabled this prosperity.
We don’t have the luxury of making mistakes - Huang Tien-mu, Financial Supervisory Commission
According to the IMF, an institution that geo-political pariah Taiwan is not allowed to join, the island-nation is Asia’s fifth-biggest economy in terms of absolute GDP ($571 billion), per-capita GDP ($24,266) and purchasing power parity ($49,827). And all achieved with a population of just 23 million – similar to Sri Lanka, whose economy is a mere one sixth of the size.
The World Economic Forum ranked Taiwan 13th in its annual global competitiveness measure for 2018, and fourth in Asia behind Singapore, Japan and Hong Kong.
Though this last year has been tougher, Taiwan has also become very wealthy. According to the 2019 Knight Frank Wealth Report, Taiwan’s total population of ultra-high net-worth individuals (generally deemed as having more than $30 million in assets) has grown 17% since 2014. Cosmopolitan Taipei alone has more than 2,000 high net-worth individuals, the eighth highest among world cities. Swiss bank UBS identified 35 Taiwanese billionaires in 2018.
Taiwan’s central bank (known as the Central Bank of China, or CBC) is also one of the world’s most shrewd, in its defensive management of the island’s foreign reserves. In May, those reserves tallied $464.43 billion, just shy of the record $464.83 billion reached in April. That’s the third-highest in Asia after China and Japan, and the sixth-biggest in the world after Switzerland and resource-rich Saudi Arabia and Russia, although Taiwan is soon expected to overtake the latter.
Taiwan’s banking and financial system is one of the world’s most secure, many say boringly so. Taiwan’s non-performing loan (NPL) ratios have been below 0.5% – the world’s lowest, according to the World Economic Forum – since 2011 and were at a record low of 0.24% in 2018. That makes for an extraordinarily safe, if somewhat dull, system.
And it is dull – though the CBC prefers the term conservative – for a reason. These days, Taiwan seldom conducts its anti-China civil defence drills, but the island’s instinct for self-preservation remains strong, as evidenced by the government’s cautious fiscal management and tight regulation.
“We don’t have the luxury of making mistakes,” says Huang Tien-mu, vice-chairman of the state Financial Supervisory Commission.
Taiwan is also over-banked. The CBC website lists 37 national banks, 29 foreign and mainland Chinese banks, and myriad finance, co-operatives and securities houses. It’s a tough domestic banking market; the government’s tight regulations contribute to some of the lowest interest margins in the world, bankers say.
Finance minister Su makes no excuses and says he’s very comfortable with this level of control and regulation. Though philosophically a free-marketeer, Su is mindful of Taiwan’s geographical and political circumstances in the foreboding shadow of China, or the “hungry tiger” as Su describes the mainland.
“We have to have a very sound fiscal situation so that we can buy weapons and defend ourselves,” he tells Asiamoney. “This is the reason why I have to keep an eye on the fiscal situation.”
Unusually for finance ministers, those in Taiwan routinely sit on the nation’s central bank board of governors as representatives of the government. Su inherited that slot on assuming office but is quick to insist that that privileged position affords him no special influence in policy or decision-making.
Taiwan has mostly achieved its economic success on its own, lacking the international input other nations might normally draw from. At Beijing’s insistence, Taiwan is diplomatically excluded from much of the critical international discourse or bonds forged between nations. China forbids dual diplomatic recognition, so the Republic of China is recognized by an ever-dwindling list of just 17 countries, soon to be 16 if Beijing’s renewed efforts to woo the Solomon Islands bear fruit. Guatemala is arguably the most influential of Taiwan’s diplomatic friends in this group of Caribbean and Pacific microstates.
As Su points out, if Taiwan were to get into dire economic strife, he can’t call on the IMF or World Bank for help – unlike Pakistan, Indonesia or South Korea.
“We are not members of the IMF or World Bank,” Su says. “Whenever there is financial turmoil, we have to solve it by ourselves. Therefore the regulation is very tight to reduce the financial risk.”
So Taiwan has to be careful.
“It’s very hard,” he says. “We cannot attend many international conventions, such as the OECD.”
As a crucial link in the global supply chain, Taiwan is a member, as ‘Chinese Taipei’, of the World Trade Organization and the less influential Asia-Pacific Economic Co-operation regional group. But he cites the Association of southeast Asian nations, the Asean economies; these represent a region where Taiwan is an important investor, and the members normally invite key economic partners to their annual summits.
“We are not invited, but this is a very important regional organization,” Su laments.
That isolation also has an impact on tax collection. Su’s ministry puts the collection rate at about 80%, the rest is lost to Taiwan’s underground economy, which is steadily being dismantled.
He estimates the black economy is equivalent to between 25% and 30% of GDP. Taiwan’s lowly diplomatic status throws up difficulties for Su’s ministry when it comes to tracking down potential taxpayers because it is excluded from international tax accords.
We are not members of the IMF or World Bank. Whenever there is financial turmoil, we have to solve it by ourselves. Therefore the regulation is very tight to reduce the financial risk - Su Jain-rong
Taipei’s response is to pursue bilateral tax treaties, just 32 in total, though drawn from Taiwan’s biggest trading partners.
Still, for all of Taiwan’s progress, Su came to office in July 2018 inheriting a mature economy confronted by serious concerns.
Taiwan’s export-reliant economy has been hit by a worldwide downturn in high-technology hardware, the island’s manufacturing specialty. And then there’s the trade war that US president Donald Trump has picked with China, which has compounded matters.
Su is anxious that Taiwan may become collateral damage in the fight, and says his biggest job in the next year is to limit the shock of the US-China trade standoff.
“I am worried it may have some fiscal impact,” he says.
Trade accounts for between 60% to 65% of Taiwan’s GDP. China has become the dominant partner since cross-strait business relations were normalized.
Taiwanese exports to China account for about 40% of its total exports, making it the biggest trade partner. Roughly 60% of Taiwan’s expatriates work in China, mostly for Taiwanese firms.
But the trade war is biting. Taiwan’s exports to China dropped 3.3% in April from 2018 levels, as demand fell away on the mainland. The 1.72% growth in GDP during the first quarter of 2019 was the slowest since 2016; growth for the identical quarter in 2018 was 3.15%. Indeed, on the very day Asiamoney talks to Su, Taiwan’s state budget and statistics office yet again cuts its forecast for 2019 GDP growth to 2.19% (having already trimmed it in February to 2.27% from the estimated 2.41% it announced in November).
The gloom has hit the currency; the new Taiwanese dollar has reached 28-month lows this year, touching 31.4 to the dollar.
The government has pushed ahead with tax reform, as well as an infrastructure and beautification strategy that is intended to provide economic stimulus.
With $2.4 billion budgeted, the development programme is a far cry from the mainland’s $1 trillion-plus Belt and Road Initiative, but Su hopes it will mitigate at least some of the impact from the trade turmoil across the Taiwan Strait.
Su is also hoping to encourage repatriation of funds held by Taiwanese offshore by proposing tax breaks when that money is re-invested locally.
“We expect it will stimulate domestic demand to offset the impact of the US-China trade war,” he says. “I think (tax reform) will become a major stimulus to induce investment.”
Su says the island’s manufacturers are nimble enough to pivot to partners elsewhere as a fallback, notably in southeast Asia. Since trade hostilities broke out between the US and China, Taiwan has touted itself as the secure alternative to mainland China – including to its own manufacturers that fuelled the boom along China’s Fujian coast and around Shanghai, opposite Taiwan.
The government has been courting Taiwanese companies to return home, and the trade war has given the initiative new life.
So far this year more than 50 companies, many in technology, have signalled their intention to re-establish factories on the island, including firms such as computer-manufacturer Quanta Computer, component-maker Yageo and metal engineer Repon Industrial. The government estimates the re-investment pledge so far to be about $900 million.
“We are also now focused on southeast Asia to diversify: Vietnam, Indonesia, Thailand, our New Southbound Policy,” he says.
He sees the trade war impact as an opportunity for Taiwan to reposition and restructure its economy and the lifeblood of its industrial sector.
A native of the gritty southern port city of Kaohsiung, 57-year-old Su was appointed finance minister in a cabinet reshuffle last year, replacing Sheu Yu-jer, who had been in office for two years. Technocrat Sheu now chairs Taiwan’s futures exchange. While Taiwan is hardly without its cronies, few political cultures in Asia are comfortable enough to appoint independent technocrats (such as Su) to the cabinet.
“I’m not a member of the (ruling) Democratic Progressive Party,” Su is keen to point out.
Nor has he been elected to the Legislative Yuan, Taiwan’s parliament. “I’m in the cabinet because of my expertise as an economist,” he says.
Su arrived in government after a long career in academia. He is an economics masters graduate of Taiwan’s prestigious National Chung Hsing University in Taichung, which has disgorged a succession of senior government officials and ministers over the years. He also holds a doctorate in public finance from Pennsylvania State University.
“I didn’t think one day I would be minister of finance,” the reserved, though genial Su says. “Maybe the tax man, yes. But I just wanted to be a professor, an academic.”
Which is what he was for 22 years, returning to Taipei after his studies abroad to teach public finance, tax policy and fiscal policy at the National Taipei University, where he was dean of the College of Public Affairs.
He was first appointed to government as deputy finance minister in 2016 after several years earning his administrative stripes as the capital’s money man, the head of finance at Taipei’s influential city government under independent mayor Ko Wen-je. Three of Taiwan’s last four presidents have been Taipei mayor.
Asiamoney asks Su what he does out of hours. He likes cycling, sometimes to work, he explains, arriving in the office before 8am and is often among the first of ministry staff to do so. He’s also among the last to leave in the evening, routinely heading home after 7pm.
“There is more work than I expected,” he smiles, saying that actually being minister and executing policy and reforms is much harder than critiquing it as an academic.
“An idea is an idea, but when it comes to realizing it, it may face some problems. You have to compromise. This is what I am doing now, but I still maintain my initial thoughts.”
As for Taiwan’s banking sector, Su says he is philosophically inclined to selling off state-owned enterprises and consolidating the industry. Two of the island’s biggest financial institutions are state-controlled: Taiwan Financial Holdings, the owner of Bank of Taiwan, with 15,000 employees and assets of $174 billion; and Mega Financial Holdings, which was created from the 2006 merger of the state’s International Commercial Bank of China and Chiao Tung Bank.
“Privatization is good, but we have to be careful because we are very concerned about wealth concentration. It depends on who buys it,” he says.
“As an economist, I have to say that privatization may be good, but in reality, that privatization has to be careful,” Su says.
That’s not for ‘political reasons’ (Taiwan’s widely used euphemism for matters mainland) he claims, but because most of Taiwan’s domestic banks are owned by powerful local families, and he is concerned about market concentration and competition.
He is, of course, referring to the influential Koo family, which owns the massive financial house CTBC (formerly ChinaTrust group) and the Tsai family, which controls Fubon Financial Holdings.
“If they were to buy a state-owned bank, they [would] become larger and larger, and wealthier and that is not good for the general public,” Su says. “As a public finance (specialist), I’m not so comfortable with liberal economics.”
Though appointed to head the finance ministry as a non-party independent technocrat, Su describes his economic philosophy as centre-left, aligning with Taiwan’s ruling Democratic Progressive Party, which also advocates Taiwan’s independence from Beijing.
Taiwan makes much of the openness of its economy, as a counterpoint to the restricted mainland. So would a foreign bank be welcomed to buy into a Taiwanese bank privatization, Asiamoney asks Su?
He hesitates at the question, and quietly consults his aides before answering.
One of them whispers to him in Mandarin ‘bu ke neng’ – impossible. Su nods and resumes the interview, now in English.
“We have to think about the opinion of the general public,” he says.
It’s a fudge to a vexatious question about the proverbial elephant in the room. With China now Taiwan’s main trading and investment partner, how much control and ownership of a notionally open economy should the state relinquish? And to whom?
Asiamoney presses the point with Su. Could China buy into a Taiwanese bank? An attempt in 2013 by China’s ICBC to buy 20% of privately held Taiwanese Bank Sinopac eventually petered out after two years of waiting for political approval in Taiwan.
Taipei bankers frequently – and covetously – like to say that Beijing’s Bank of China’s branch in Taiwan is among the most profitable in the BOC worldwide network, thanks to its domination of Taiwan’s renminbi-clearing niche and the burgeoning cross-strait trade links.
The BOC led a handful of state-owned mainland banks, notably Bank of Communications, Agricultural Bank of China and China Construction Bank, in opening branches in Taiwan after regulators on both sides of the Taiwan Strait loosened rules in their Economic Cooperation Framework Agreement in 2010.
At the very least, we ask Su, shouldn’t Taiwanese banks be dominant in clearing that renminbi pool in Taiwan?
Su acknowledges the buoyancy of BOC’s branch in Taiwan, which opened in downtown Taipei in 2012 and regularly issues formosa bonds in renminbi.
“I know, all the RMB users go to that branch,” he says.
He laughs, but wriggles away from addressing the China question. Indeed, whenever the question of China’s deeper involvement in Taiwan’s economy or financial system is raised, Su goes into a huddle with his aides, five of whom are in the interview room with him.
“This part is hard for me to answer,” he says.
And in Taiwan, Su is not alone.