The Taiwan Banker

Only practical actions, not slogans, will improve Taiwan’s competitiveness.Taiwan is awash with money. In 2017, its excess savings exceeded NT$ 2.5 trillion. Household and non-profit financial assets are growing even faster, from NT$ 30 trillion in 2000, to NT$ 86 trillion in 2016. Taiwan has too much capital to enter the broader economy. As it enters a period of smooth growth, though, its future accumulation of wealth will inevitably slow, creating more need for the asset management industry to protect people’s wealth. Cathay Pacific Holdings Chief Investment Officer Sophia Cheng stressed that Taiwan has many advantages for the asset management industry. She put forth eight recommendations to increase the competitiveness of Taiwan’s asset management, bring back capital and talent, broaden the scale of the industry, and increase tax revenue. The end goal is to turn Taiwan into an international hub.Increasing Regional Competitiveness through Improved MechanismsAsset management is better known in countries like Singapore. As early as 10 years ago, Cheng – who had already become well-known in foreign investment circles – advocated the creation of an asset management industry to handle Taiwan’s rapidly growing wealth. She said that due to Taiwan’s 50 years of foreign currency reserve development, it had a great foundation for the industry to spread capital to the broader economy. The debt ratio of listed and OTC companies is low, with obvious surplus funds. Unforgivably, however, there are no asset management or financial commodity planning industries.Vicious price competition in Taiwan’s banking industry has resulted in the lowest spreads in Asia, which in turn has made banks afraid to lend money to new ventures and SMEs, which need funding but have relatively high risks. Banks have clearly given up on their role as financial intermediaries. Taiwan’s large enterprises are not short of funds. If deposit funds are in surplus, banks should guide the capital to wealth management planning so it can be properly deployed. Only when banks return to risk pricing discipline can the vicious cycle be reversed.Over the past few decades, Taiwan has cultivated outstanding financial experts. There is no shortage of industrial parks, but without good industrial development strategies, there has been no reason for them to stay. The result has been a continuous outflow of capital and talent to Hong Kong and Singapore. The Chinese mainland has recently been actively developing its financial markets. It is becoming urgent for Taiwan to respond to regional competition.Rethinking Industrial StructureCheng said that ever since capital controls were relaxed in 1983, the amount of money allowed to be remitted by individuals each year has been almost the same as the free flow of funds. However Taiwan lacks an attractive environment to keep funds in place, with suboptimal tax security, so the funds end up leaving the country. Therefore, if the government is able to plan prudently – starting with the promotion of diversified financial products, allowing funds and talent to remain in Taiwan – a positive cycle can occur. Cheng emphasized that Taiwan should examine changes in its own economic structure, put forth good industrial policies that enhance value, and participate in international markets. Then, it can increase the power of Taiwanese industry, generate employment and profit, and eventually increase tax receipts.One of the government’s current wishes is for “finance to support industry.” This idea still assumes that finance only involves lending and policy sales, as a marketing clerk. In fact, with declining corporate and personal leverage, many borrowers have long ago become investors. Cheng believes that support for industry should be merged with asset management. After all, global investment can also bring high added value. Thus, the government should also regard financial development as an economic problem. Without proper planning, long-term economic development will lag.Eight Ways to Empower the Industry Cheng suggested that the government can start from eight key directions to improve the competitiveness of the financial industry and develop the asset management industry.The first is amnesty and tax declaration for funds repatriation. Following overseas repatriation experience, the government can attract overseas capital back. Once the funds return, talent will follow. Therefore, she recommended the use of lump-sum taxes to transparently return overseas capital. The period of amnesty should exceed the tax recovery period, so that declaration is protected by law, and the returning funds are not audited during the amnesty period, so that applications can feel confident in their tax security. This is the key factor in effective capital backflow.In the past few years, countries such as Italy, America, Australia, and India have all implemented tax amnesty policies, not only allowing large amounts of funds to flow back, but at the same time allowing the government to collect back taxes. The US implemented land tax amnesty schemes in 2009, 2011, and 2012, collecting a total of US$ 6.5 billion in supplementary taxes, interest, and fines. About 45,000 cases were actively filed. In July 2016, India started a similar scheme. By March 2017, a total of 960,000 had declared 4.884 trillion rupee (about US$ 366.5 billion), about 40% of India’s GDP, allowing India to receive 135 trillion rupee (about US$ 10.1 billion) in back taxes, 80% of its target.Second, OBU business should not be restricted to foreigners only. When the OBU category was established, only foreigners could open accounts. In consideration of product diversity, when the restrictions on Taiwanese people to accumulate, export, and import funds were reduced, wealthy individuals chose to park their funds in Singapore and Hong Kong. Changes should be considered so that, as with Singapore’s Asia Currency Units (ACU), as long as local currency is not involved, OBUs can do anything. In other words, as long as they only do non-NTD business, they avoid currency rate fluctuations through currency differentiation. “OBUs should not be limited to foreigners,” Cheng said. “This way, they can also serve wealthy locals abroad.”Third is good use of graded management. Letting the top players sprint ahead has both its pros and cons, but heavy penalties must still be charged for any major violations. For well-performing and disciplined businesses, the government should help expand their business, and relax controls. Separately, for companies which manage large amounts of public funds, regulators should examine their emphasis on human resource development and establishment of investment research teams, rather than just their product types. In the past, the opening of financial commodities often fell under the pattern of foreign servility. Regulators should evaluate the contribution of foreign companies to Taiwan’s industry, such as how may professionals they train locally, and how much they pay in taxes. Foreign companies should not simply earn money in Taiwan without contributing anything.Fourth is raising flagship trusts. In international practice, if a single fund is too small – under US$ 500 million – it will be difficult for it to attract investment from multinational sovereign funds and pensions. Thus, Taiwan should build up some large-scale funds to attract large international institutional investors. Taiwan’s operational performance in Asia and Greater China is good. In terms of onshore and offshore funds’ 3-year returns on mainland A-shares, six of the top 10 trusts are from Taiwan. Taiwan’s trust business is actually quite strong, and it can become an Asian leader.Fifth is making good use of pension or insurance funds, and assisting investment in overseas funds. Using UCITS funds, pension or insurance funds can first assist the fund to build up its initial scale, attracting foreign investors. Then, after it reaches a certain scale, the initial investors can retreat.The sixth is establishing an environment of compliance, so that the industry can be trusted. Current regulation prohibits investment practitioners from managing the investments of second-degree relatives. For talented individuals to stay onshore, practitioners should be allowed to legally manage their finances, but misconduct must be severely punished, and speculators driven out.Seventh is matching education with industry development. College students should build their financial knowledge in school, including international trends. Doing so will bring asset allocation expertise to an international level, taking into account investment income and risk considerations, and teaching students to put the interests of clients at the forefront. If industry terminology is not learned until after entering the professional world, it will already be too late.The eighth and final point is development of lifestyle services. Asset managers invest globally, blending work and life, leaving little time to care for their families. Support from lifestyle services is needed to attract and retain high-quality talent in Taiwan. Taiwan lacks pipelines and professional training platforms for quality helpers. It has become an old-age society, and the social elite are “sandwiched” between their elders and children, unable to concentrate on their profession. In addition, to solve the educational problems faced by foreigners coming to Taiwan, international schools should set up an English or multilingual environment. Coherence with international curricula will give overseas Taiwanese experts whose children are enrolled at international schools abroad the peace of mind to return home.Establishing Appropriate SystemsMeanwhile, modification of existing systems to match the industry environment is also important. Cheng emphasized not blindly following international trends – which in fact may ignore the background behind the Western system. It is easy to please international perception while ending up having no internal strategy. Taiwan has its own characteristics and difficulties, so it must adapt its system to local conditions.Cheng said that although Taiwan is small, it must make itself respectable. Asset management should be a task for its strategic transformation. The government should consider its development as on the level of national strategy, coordinate ministry resources and inter-ministerial conferences, and formulate a white paper on industry development, so that Taiwan’s industrial development is not overly affected by political changes. Taking South Korea as an example, the policy direction of its FTAs does not change with a new regime. In addition, more cities in Taiwan can create asset management industry bases like Manchester or London, with the hope that more people discuss international trends, building a learning society. Knowledge, in turn, can be used to scale production, so that asset management produces more tax revenue, and makes Taiwan more internationalized.Cheng emphasized that more slogans are not needed for Taiwan’s competitiveness, but rather practical actions. Success will mean international institutional investors becoming more willing to use Taiwanese asset management companies.