Armed with a doctorate from the London School of Economics and rich experience in trade negotiations, China policy and legislative affairs, Tsai Ing-wen assumed posts in late January as vice-premier and convenor of the Taiwan Cabinet’s task force for economic and financial affairs.
The Banker’s editor-in-chief Stephen Timewell and Taiwan contributing editor Dennis Engbarth discussed Taiwan’s future economic development and financial reform with the new vice-premier in her office at the Executive Yuan in Taipei.
Q What are your administration’s main goals for Taiwan’s economy at present?
A Our administration’s top priority is maintaining stability for business. We are in a situation in which we have internal difficulties and external problems with China and in a country that is still in a democratic transition.
We need to ensure that the economy remains healthy and carry out needed reforms in industry, public finance, government restructuring and other areas to cope with increasing global competition. Since some people lose jobs and need retraining and others may lose jobs permanently in the process of globalisation, we also need to build a sound social security system.
We also face challenges in coping with the rise in world crude petroleum prices, and the possibility that chaos in other areas may affect the supply and the price of this critical commodity. We thus have a challenging task to maintain macro stability for economic governance.
We also have to consider how to overcome some fundamental fiscal and financial challenges. First, our central government budget deficit is becoming a problem. Our ratio of central government debt to gross domestic product (GDP) is relatively low internationally, but still high by our standards.
We plan to realise a balanced central government budget by 2010 but achieving this goal will require considerable effort. We must also maintain a careful balance between the effort to reduce the budget deficit and maintain a decent pace of economic growth.
In terms of financial markets, we must first realise that we have a much more mature economy than before. In the past, we were proud of our manufacturing capability and solid industrial base, but we now need to develop a sound and competitive financial market that can operate by itself and a financial sector that can go into the international market along with industrial firms.
In the past, banks were there to facilitate and supplement the industrial base. What we now need is a sound capital and financial market that can operate independently even without an industrial base. We want the banks to be competitive and capable of expanding into the international market.
Q Seventeen of Taiwan’s banks are in the The Banker Top 500, so they cannot be considered small.
A During the past few years, there has been substantial change. Our private banks are now more viable and are able to recruit the management personnel they need, many of whom previously worked for multinational banks or financial companies and can bring international elements into our domestic financial institutions. Moreover, our private banks and financial institutions are consolidating among themselves through the formation of financial holding companies.
The formation of 14 financial holding companies has brought financial institutions of different types into the same family. Now we are in a second phase of consolidation between different ‘families’ in financial holding companies to form financial institutions that can compete internationally.
This process creates major challenges for the regulatory authority in the new Financial Supervisory Commission because financial holding companies are much more complicated and have a bigger presence in the market. Moreover, there are transparency problems because it is not so easy to know what is going on inside financial holding companies.
Q In October 2004, [Taiwan’s] president Chen Shui-bian set ‘second financial reform’ targets for the formation of three banks with domestic market shares of at least 10% by the end of last year, for the reduction of the number of banks in which the government has share holdings from 12 to six and the merger of the current 14 financial holding companies into seven by the end of this year. Are such targets feasible?
A People who are responsible for carrying out this project have to be very careful to avoid hasty decisions or actions that may prove counterproductive. We will make the best effort to realise these goals at the earliest time.
Q The government appears to be having problems with gaining legislative support for the second phase. Why?
A The government has come under criticism from the legislature, the media and some of the public, largely because this effort marks the first time that a truly major change is envisioned in the structure of the market. People in Taiwan are accustomed to the idea of extensive government ownership and are concerned when we discuss mergers and acquisitions or the disposal of state assets. There are also concerns over the possible effect of over-concentration of economic power on politics in our democracy.
We can say that we are gaining improved competition in companies and better development of the industry in return, but the results are not easy to see in the initial stages.
The problems that people raise are not unreal and their concerns are not entirely unjustified. They need to be assured that there are mechanisms available to address such concerns. We must engage in more dialogue in the legislature and with the general public to ease their uneasiness.
Q How can you overcome such concerns?
A One way to assure people that the process will go smoothly is to show that the government has the means to cope when it finds something wrong.
In my view, the most effective means in a modern economy is not restrictive or prohibitive orders from the government, but policy instruments that are more consistent with the idea of a market economy.
For example, with regard to banks that the government controls or has a major stake in, the government needs to act like a real shareholder in the market and follow market logic and rules. The government needs to maintain a certain stake in some major financial institutions so that it can act as a balancing force in the market and protect the interests of the general public. In other words, the government has to be prepared to act like an ordinary shareholder with market logic and aim to protect shareholders, like a trustee.
Q With many clients of Taiwan’s banks investing or moving operations into China, what are the prospects for the government allowing Taiwan banks to open branches in China?
A Our government does not have fundamental objections to the expansion of our banks into the market in China, but there are a number of complications.
China offers opportunities, but people in general would agree that it is also a source of uncertainty and risk. Seventy per cent of Taiwan’s overseas direct foreign investment is in China. I think no-one would object if we said that we have to consider whether we have invested too much in such a risky place and need to deal with the risk. Our way is not to add restrictions, because we must find a better way to deal with risk that is consistent with the market.
When I was chairwoman of the Mainland Affairs Council in the first term of our Democratic Progressive Party government, we allowed more than 10 banks to set up representative offices in China. Setting up such offices is the first step toward establishing a meaningful presence, such as a branch or a subsidiary bank. We have also tried to reduce past prohibitions and allow banks to set up offshore banking units to provide finance to client firms in China as a transitional measure.
The People’s Republic of China (PRC) government also imposes quite a lot of restrictions in terms of market access or market opening to foreign banks or other financial institutions.
We do not expect that there will be no risk but we need to make sure that risk is at an acceptable level. Taiwan’s financial firms need to be prepared to have better risk management and to be even better than other international firms in risk management because of the political situation across the Taiwan Strait.
Through the second financial reform, we are also building the foundations for Taiwan’s financial firms to go into China by fostering the formation of larger banks, which are presumably better equipped in developing risk management.
The government also needs to know how to deal with risk and needs to co-operate with supervisory agencies in the PRC.
Q What is the main obstacle in this area?
A In terms of managing risks, co-operation between regulatory authorities is very important. If we let our banks operate in China, we must ask whether there is an effective way to monitor what they do there and see to what extent their activities affect their soundness. This will require sharing information with financial regulatory authorities on the mainland and will unavoidably require some degree of co-operation among our official regulatory authorities.
This is the hardest part in dealing with this issue. We have been trying very hard to find some points of flexibility. Unfortunately, we have not yet been able to produce any concrete results but we are willing to talk at any time. If the two sides have the will to work together, I am sure we can find flexibility somewhere.
