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ANALYSIS: Business leaders cautious on TSE opening to China

The Taiwan Stock Exchange's (TSE) plan to allow Chinese investors to buy Taiwanese stocks is unlikely to take effect ahead of the opening of direct transportation links, although such a liberal move would greatly benefit the domestic stock market, local business leaders said.

"I don't think that opening the stock market [to Chinese investors] would be priority after the elections," said Jason Fong (馮志良), deputy secretary-general of the Chinese National Federation of Industries (工總). "It is also unlikely that Chinese authorities would allow [Chinese] capital to spill over to Taiwan since many Chinese companies list in Hong Kong."

"Human flows always come before capital flows," he said. "If Chinese are not allowed to travel freely to Taiwan, they will be worried about any capital outflows to Taiwan."

TSE chairman Wu Rong-i (吳榮義) said in an interview with Bloomberg Newswire on Nov. 16 that the local bourse was preparing for an influx of Chinese investments to boost the value of the local stock market, which has underperformed its Asian counterparts in the past few years.

"Taiwan will eventually have to open up to China in order to stay competitive and be globalized," the report quoted Wu as saying. "Both sides are set to become more liberalized and that trend cannot be reversed."

An economic adviser to Democratic Progressive Party presidential candidate Frank Hsieh (謝長廷), Wu believes the presidential election in March would pave the way for an agreement with Beijing as both presidential candidates favor better relations with China, the Bloomberg report said.

The report also quoted Wu as saying that the exchange was considering implementing measures such as permitting electronic proxy voting by future Chinese shareholders through e-mail.

The TSE chairman, however, told the Taipei Times on Thursday that the "TSE hasn't been working on any concrete measures at this point."

Given the cross-strait political standoff, Luo Huai-jia (羅懷家), executive director of the Taiwan Electrical and Electronic Manufacturers' Association (電電公會) is not optimistic that governments from both sides will give the green light to such a proposal any time soon.

"We have limited hopes since both parents-in-law [referring to the Taiwanese and Chinese governments] have to agree," Luo said.

Neither did Luo think that opening the stock market would be incentive enough to lure Taiwanese businesspeople in China to return home and seek domestic listing.

"The key hurdle [for Taiwanese companies to return and list in the home market] is the government's 40 percent cap on China-bound capital," he said. "It has nothing to do with whether the local stock market is open to Chinese capital."

"Businesses can raise money anywhere, but they need to be able to freely decide where their money can go," he said.

Luo joins Fong and other business groups in urging the government to further ease restrictions on China-bound investment, including capping investment at 40 percent of a listed company's net worth and allowing direct transportation links to attract Chinese tourists.

Although plans to open up the local stock market to Chinese shareholders are still at an early stage and face a gamut of issues, such as currency settlement and clearance, businesses welcome the idea.

"That would be great news [for the TAIEX]," Taiwan Securities Association chairman Hwang Min-juh (黃敏助) said.

Brushing off concerns that hostile Chinese capital could negatively impact on the local capital market, Hwang said: "It's only a question of gains or losses as money knows no borders and bears neither enmity nor affection."

Polaris Research Institute president Liang Kuo-yuan (梁國源) agreed that "the possible size of capital inflows from China will be enormous considering its excess liquidity."

Given China's US$1.4 trillion in foreign exchange reserves, "one tiny opening will be a huge boost [to the TAIEX] since Chinese capital has no way out, which is why the prices of its equities and properties are shooting up," Liang said.

Hong Kong's recent bull run, with the index scoring a 30 percent gain, is a good example of how Chinese capital helped boost the market. China in late August said it would start a pilot program to let some of its 1.3 billion citizens buy Hong Kong shares.

The TAIEX's annual turnover dropped to US$745 billion, as of September this year, from a high of more than US$1.3 trillion in 1997, although its market capitalization climbed to US$724 billion in September. The number of TSE-listed companies is also on the wane at 685 -- far smaller than Shanghai's 855 publicly traded companies, South Korea's 1,725 companies and Hong Kong's 1,210 companies.

Unlike Hong Kong's service-oriented economy, analysts said that the TSE, where world-leading Taiwanese high-tech companies are listed, is of great interest to Chinese stock investors.

"The Taiwanese market is more transparent with a healthy economy," said Cheng Cheng-mount (鄭貞茂), chief economist with Citibank NA (Taiwan), "with listed companies averaging a low price-to-earnings ratio," offering "potential profit gains."

It would certainly be attractive to Chinese investors once the TSE opens up to China, Cheng said.
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