Government reform plan hits bumps

The failure to sell a major stake in state-controlled Chang Hwa Commercial Bank Ltd (彰化銀行) heralds a bumpy road ahead for the government in its plan to overhaul Taiwan's financial sector within the next 19 months, financial experts said yesterday.

The government had planned to introduce a foreign strategic partner into Chang Hwa Bank by issuing 1.4 billion new shares, or about 22 percent of the lender, in form of global depositary receipts (GDR) by June.

The government's original plan was to offer another 1.12 billion shares following this to help boost the foreign investor's stake in the bank to 40 percent stake.

But, lower-than-expected bids from potential investors have stalled the offering, the Ministry of Finance said last Friday. The government, which now owns about 23 percent of the nation's No.6 bank by assets, is scheduled to announce an alternative share sale this week.

"The failure upset the government's efforts to encourage mergers among 12 state-run lenders [to reduce their numbers to] six by the end of the year," said Hsu Chen-min (許振明), an economics professor at National Taiwan University.

The government had aimed to use the landmark deal as a catalyst to speed up consolidation in the nation's overcrowded financial sector and spur privatization of state-run banks.

The efforts are part of a bigger reform plan announced by President Chen Shui-bian (陳水扁) last October, in which the number of financial holding companies is to be halved from the current 14 in order to create large-scale financial companies with stronger competitiveness.

Susan Chu (朱素徵), a financial analyst with Taiwan Ratings Corp (中華信評), said, "the market needs a good deal, especially for mergers of state-run companies, to spur more mergers. Local banks are taking a wait-and-see attitude as the cost now is relatively high."

If state-controlled banks could set a good example, local rivals would follow suit out of fear of missing out on good targets and losing their competitive edge, she said.

To fulfill Chen's plan, the government should let market forces decide the pricing mechanism, rather than stubbornly sticking to a certain price, especially when most local lenders are unable to provide transparent financial reports, Hsu said.

Government officials, however, have reason to justify their stubbornness. They are under heavy pressure from legislators to sell state-owned lenders without giving big discounts.

Minister of Finance Lin Chuan (林全) has said the government will not sell shares if the price is not right.

The turbulence in the GDR issuance has dragged down Chang Hwa Bank's stock price by nearly 19 percent since the beginning of the year. The bank's shares closed at NT$17.8 on the Taiwan Stock Exchange last Friday.

To stimulate more movement among local financial institutions, Hsu said the government should urge local banks to boost financial transparency to minimize pricing differences.

William Lin (林蒼祥), a finance professor at Tamkang University, suggested that expanding the bidding for share offerings of state-run banks to local financial institutions would help speed financial reform.

Though the government's plan was based on the successful rescue of Japan's Shinsei Bank Ltd -- formerly a debt-ridden bank -- in just a few years, the approach may not suitable for Taiwanese banks, he said.