The entry into power of a pro-independence government in Taiwan led by President Tsai Ing-wen has raised political tensions between the island state and China, but the head of Taiwan Stock Exchange Corp. (TWSE) is an optimist when it comes to reading the political tea leaves across the Taiwan Strait.
“China is the No. 1 trade partner of Taiwan,” exchange president Michael Lin tells Institutional Investor. “Everyone sees the importance of strong and positive ties. I am sure the new president and her administration will be pragmatic when dealing with sensitive issues regarding China. I don’t believe global investors have anything to worry about.”
So far, the market appears to share Lin’s optimism. The Taiwan Stock Exchange Weighted Index closed at 8,597.11 on June 6, up 10.8 percent since the January 16 election, which saw Tsai rout the Kuomintang’s presidential candidate, Eric Chu Li-luan, and her Democratic Progressive Party win a solid majority in Parliament. The Shanghai Shenzhen CSI 300 Index, by comparison, was up just 1.9 percent over that period.
Looking ahead, Lin regards technology and connectivity as vital to the health of the Taiwan exchange. That’s not surprising given that foreign investors have at times owned as much as 40 percent of the exchange’s $750 billion market capitalization.
Over the past three years, the exchange has invested nearly $100 million to upgrade its technology, including the development of a data center that can handle much greater trading volumes and is designed to withstand Magnitude 7 earthquakes and flooding. Lin is preparing to launch a partnership agreement with Singapore Exchange that will allow members of the Taiwan exchange to directly trade securities listed on the Singapore market; the two bourses envisage a reciprocal arrangement at some point in the future that will give Singapore brokers direct access to the Taiwan market. A two-way deal, if complete, would be akin to the Stock Connect programs that allow direct trading between the Stock Exchange of Hong Kong and the two leading Chinese exchanges, in Shanghai and Shenzhen.
Lin doesn’t want to stop at Singapore, though. He aims to integrate the Taipei exchange into the greater China market, including direct trading links with the Hong Kong exchange and, politics permitting, with the Shanghai and Shenzhen markets. “Charles Li and I communicate regularly,” he says, referring to the CEO of Hong Kong Exchanges and Clearing, which operates the Hong Kong bourse. “It is quite easy for us to form a Hong Kong–Taiwan linkage.”
Whether Taiwan can ever link up with its mainland counterparts is far more difficult to predict because it will depend on political considerations on both sides of the Taiwan Strait, says Lin. “The technical aspects of exchange linkages with China would be the easy part,” he says.
Lin, 65, is a veteran observer of relations between Beijing and Taipei. Taiwan has operated under self rule since 1949, when the Kuomintang fled to the island after losing a civil war on the mainland to Communist forces led by Mao Zedong. Beijing continues to regard Taiwan as a renegade province and threatens to invade if Taipei ever declares formal independence.
In 1990, when Lin was working as a system engineer at the island’s postal service, he says he got a lucrative job offer from a U.S. software company but turned it down to join Taiwan Depository & Clearing Corp. “I always believe in Taiwan,” he explains. He advanced to become a senior executive vice president, then joined the Taiwan Stock Exchange in 2006 in the same position. He rose to the top job when former president Samuel Hsu left the exchange in 2013.
Whether the Taiwan exchange can ever open a direct link to either of the mainland exchanges will depend on whether the new government and the legislature ratify the Cross-Strait Service Trade Agreement, which was negotiated by the previous, Kuomintang, government of Ma Ying-jeou, whom Tsai succeeded as president last month. The agreement would allow Chinese companies to seek public listings in Taiwan; it also would allow Taiwanese brokers to formally gain renminbi quotas from China’s central bank and to begin offering offshore renminbi-denominated investment products. The legislature has never ratified the deal, however.
Tsai is reappointing some officials from the Ma government, several of whom were involved with negotiating previous trade agreements with China, Lin notes. Of the 900 companies listed on the Taiwan exchange, about 80 percent have a significant presence or investments on the mainland, he says. The new government will be focused on “livelihood issues” and cannot afford to alienate major business groups or the financial markets, he contends. “Global investors need not worry,” Lin says. “Taiwan is export-oriented, and it is easily impacted more by global markets than its ties with China.”
Anshuman Jaswal, a New York–based senior analyst with financial market research firm Celent, says Lin has his work cut out for him. “TWSE has certainly made the right moves in terms of improving its attractiveness in the Asian market,” Jaswal says. “But the region is highly competitive.” Major exchanges on the mainland; in Japan, Hong Kong and Singapore; and across Southeast Asia have been adding products and improving their technology, he notes. “The stronger economies in the region are expected to see greater inflows,” Jaswal says. “Hence in spite of all of these improvements, TWSE will find that it is still operating in a tough market environment.”
Lin plays down the idea of direct competition among exchanges. “Many of the Asian exchanges are national symbols, and no two exchanges are the same,” he says. That said, Lin notes he has been pushing for improved corporate governance so more foreign fund managers will invest in Taiwan. In 2015 the exchange launched the TWSE Corporate Governance 100 Index, which assigns performance measures to listed companies. Such moves are meant to improve governance in the marketplace, Lin says, adding that both domestic and foreign fund managers have welcomed the index as a means of improving transparency.
Such measures will have a greater bearing on the health of the local market than politics will, asserts Lin. “The new president and her financial and economic policies, of course, will have an impact, but the most important element determining the success of the exchange has more to do with what we do to improve the exchange,” he says. “As long as we continue to improve the exchange and corporate governance in Taiwan, foreign fund managers will be pleased.”
Follow Allen Cheng on Twitter at @acheng87.
