Stock listing rules need to be tough

By Kenneth Lin林向愷  / 

Sat, Jul 10, 2004 - Page 8

Premier Yu Shyi-kun recently told a group of business executives that the fact that only one Taiwanese-owned company based in the People's Republic of China (PRC) had satisfied the requirements to apply for listing in Taiwan shows that the government is demonstrating too little creativity. He requested government agencies to come up with proposals to deal with this situation within a month.

A PRC-based Taiwanese-owned company's decision to apply for listing in Taiwan is a financial choice -- it is not a decision to invest in this country. An investment decision concerns what real assets a company should invest in, and is a driving force behind economic growth. A company will decide where and how much capital expenditure to make based on the additional wealth an investment project will create for the company. If more PRC-based Taiwanese-owned firms are willing to invest in Taiwan, this indicates that they see Taiwan as a good or promising environment in which to invest and conduct business. Such investment decisions are in Taiwan's interest, so the government not only wants to assist these businesses, it should also encourage them.

Before a company can make capital expenditures, it must obtain financing. A financing decision concerns the ways a company raises money to pay for assets to be used in the investment plan. And under increased globalization, financing decisions also need to consider where to raise the money. By listing in Taiwan, those PRC-based Taiwanese-owned companies choose Taiwan's financial market as a place to raise the funds for investment in China. Naturally, they hope to bring the money raised in Taiwan back to China without any restrictions.

The only benefit for the nation from allowing those companies to list in this country is to see the expansion of Taiwan's financial market and to give investors more stocks to choose from. If the government lowers the requirements in the application for listing in Taiwan by relaxing restrictions on how much money those listed companies can invest in China, it is akin to encouraging those firms that illegally invested in China to return to Taiwan to collect money to pay for their capital expenditures in China. Not only is this unfair to those Taiwanese businesses that played by the rules, but it will also make it much harder for those companies that have kept their roots in Taiwan to raise money to pay for investment spending. This will eventually hurt Taiwan's long-term economic performance.

Under globalization, funds can move freely across national borders, and theoretically, funds used to finance investment do not necessarily have to be raised within the country where the investment is made. Furthermore, domestic savings can be moved around the world chasing the best investment opportunities. However, international research shows that domestic savings in developed countries supplies most of the funds for capital expenditures within those countries, and domestic investment draws money primarily from domestic financial markets.

Political and economic systems differ between countries, with these differences including social organization and the ways that public policies are formed and carried out. These are important factors in country risk assessments. When an individual investor seeks investment opportunities in another country, it is these political and economic factors that make the outcome difficult to predict, and this uncertainty explains why most funds are invested domestically. Since China is not governed by the rule of law, these risks are considerable. Hence another consequence of the excessive relaxation of restrictions is that Taiwan's financial market will be exposed to greater political and economic risks from China.

Differences in standards in the accounting systems, financial markets, regulations on corporate governance and market transparency are quite substantial between Taiwan and China. If regulatory authorities lower the requirements for listing in Taiwan and fail to impose a high standard of regulation on the corporate governance of the listed PRC-based Taiwanese-owned companies, risks to investors increase. Since private investors lack the ability to effectively monitor those firms' business and financial operations, the problems caused by false accounting, insufficient disclosure and the provision of misleading information can seriously affect Taiwan's financial market as well. When such cross-border market activities lack discipline and tough regulation, any further measures promoting internationalization and deregulation are unlikely to receive public support.

For now, the government should be careful not to sacrifice the general interests of society in order to increase the number of PRC-based Taiwanese-owned companies that are listed in Taiwan. It should instead put more effort into improving the environment in which firms invest and operate, strengthening discipline in financial markets to increase transparency, and introducing tougher laws to improve corporate governance. In this way they can raise investors' confidence in the capital market and boost foreign investment. If the government fails to do so, more local firms will move to China, and fewer firms will invest in Taiwan.

Kenneth Lin is an economics professor at National Taiwan University and a former finance director for Kaohsiung City.

TRANSLATED by Paul Cooper