Analysts concerned by lack of legal footing stunting bond market's growth

Taiwan's underdeveloped bond market is crippling the development of its capital markets. And unfortunately, the status quo is unlikely to change before the presidential election next March, according to government officials, financial lawyers and bankers.

Asset securitization and the development of bond market is again a hot topic in view of various factors such as the 921 earthquake and the related housing mortgage problems, banks' bad debt, liquidity problems among small and medium-sized businesses, and the government's need for a large amount of capital for post-quake reconstruction projects.

Finance professor Li Tsuan-hsiou (李|s-*) of National Taiwan University pointed out in an article written for a Nov. 4 financial conference held in Taipei that in Taiwan an average of 28 percent of insurance companies' assets are held as cash or in bank deposits, while similar companies overseas only keep 3 to 5 percent to maintain some liquidity.

"The bond and stock markets are two pillars of the capital market. In developed countries, the scale of the bond market [including issued volume and trade volume] is usually bigger than the stock market," said Li. However, partly due to taxation problems, Taiwan's bond market has remained underdeveloped.

As a result, "Insufficient fixed-income investment tools have forced insurance companies to hold their assets either in the form of high-risk stocks or low-risk but low-return bank deposits," said Chu Jung (儲蓉), associate research fellow at the Taiwan Institute of Economic Research.

To develop the bond market or assets securitization market, the government needs to make new laws and change its attitude, financial lawyers say.

"In Taiwan, the government's policy priority clearly demonstrates that the manufacturing industry is the root while finance is the leaf of the economy," said Liu Shao-liang (劉2樑), an attorney at Lee and Li (2z律法律事務所). That is to say, as an export-oriented economy, many companies accumulate their foreign exchange, but because Taiwan is internationally isolated, they don't want to securitize that foreign exchange.

From a legal perspective, "Taiwan's legal system is that of continental law, which stresses `stability,' and in essence contradicts `innovation,' the key element in developing the financial market," Liu said.

"Next year's presidential election may create a window of opportunity for innovation. If Taiwan wants to develop its capital market, it has to make new laws. If the government does not make new laws, the push for securitizing financial commodities will not last long," Liu said.

"Japan, Korea, and Thailand all resort to the creation of new laws to solve problems in the evolving process of asset securitization," he said.

While the government needs to pass new laws to facilitate a healthy bond market, "the government also needs to make adjustments in terms of their ways of interaction with the private sector," Liu said.

"The capital market is business without boarders. The parties involved have to take responsibility for their investment choices."

In the meantime, according to Pai Wayne (白?憟?/CHINESE>), president of Polaris Securities Group (寶來證券集1?/CHINESE>), the government needs to help Taiwan's business "to diversify its ways of collecting funds."

However, the need for asset securitization is not expected to be high, bankers say. "From an investor's point of view, Taiwan does need more ways to deal with fixed income investment," said Lin Wei-yi (林維義), president of Central Insurance Co. "But, from a provider's point of view, because banks in Taiwan, Hong Kong, and Singapore are very well capitalized, there may not be an immediate need for financial asset securitization."