F. K OREA I NVESTMENT C ORPORATION (KIC)
IV. CASE OF TAIWAN
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IV. Case of Taiwan
IF Taiwan wants to establish SWF, there are some key concerns to think about. Here, I use the same framework as case analysis: background; the purpose and intention; the scale;
the source of SWF; investment policy of Taiwan SWF; and the governance. When considering establishing SWF, Taiwanese government can refer to other SWFs as examples, especially Singapore’s SWFs since the background and situation are similar to each other—high foreign exchange reserve, lacking of natural resources, and having high development of domestic financial market. On the other hand, the strategic function of SWF, such as Singapore Temasek Holdings, may be the way that Taiwan needs to learn about.
Background
From the cases, we know that SWF home countries can be those countries with abundant natural resources or not. Like Norway and Abu Dhabi are abundant with oil resources, however, Singapore and Korea are lack of natural resources. The only common thing is that SWF home countries have the needs to manage huge government revenue. For Taiwan background, it is obvious that Taiwan is lack of natural resources. Even though, Taiwan government holds huge foreign exchange reserves and Taiwan is a high development of domestic financial markets. The followings are the description about Taiwan background that I think why it is the time to set up Taiwanese SWF.
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After the global financial tsunami that erupted in the mid of 2007, the world economy went into recession, and Taiwan faced the same situation and not completely recover from it.
In addition, even though the global economy seems to start reviving, all investors still do not dare investing oversea easily. In this situation that (1) Taiwan holds huge amounts of foreign exchange reserves, (2) it is hard to find good objectives to invest overseas, and (3) Taiwan domestic market needs capital injection to stimulate the domestic economy, but it’s hard to get finance from foreign investors; the background of Taiwan is just like Singapore in 1970s’, and it is a perfect timing to make action setting up Taiwan SWF.
Purpose
From previous cases, every SWF were set up for their own purpose: the management needs for huge government revenue and the purpose to increase countries interests. The purposes of SWFs are different as different countries backgrounds and needs. ADIA plays an important role on government revenue stabilization, and invests in objects with negative correlation relative to oil price. Norway GPF was set up to safeguard and build financial wealth for the future generation, and to meet Norway’s rising national expenditure on pensions and health care in the coming years. Singapore Temasek Holdings plays a strategic role, like a pioneer, which entered into those immature or key industries (financial and telecommunication industry) for the country to stimulate domestic industry development. And now those fields
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become the main industries in Singapore. KIC, which focused on financial field, also had a comprehensive plan to transfer Korea into a major centre of financial.
Now, let us turn back to Taiwan case. Why Taiwan needs to set up SWF? What is its purpose?
First of all, it is true that Taiwan holds a huge amount of foreign exchange reserves, and we need to find a more efficient way to manage this government revenue since the current main investing policy is conservatively buying foreign government bonds. Second, after the prosperity of domestic economy that semiconductor industry brought, Taiwan needs to figure out the next blue-chip industry, and invest it hardly. This domestic investment is especially important to help Taiwan recover from financial crisis, and lead the next economic thriving era. The domestic industry upgrading needs significant capital, and SWF can play the key role to stimulate the action.
Therefore, I think Taiwan has two intentions to establish SWF: (1) manage foreign exchange reserves more efficiently and seek for better investment return; and (2) inject capital domestically to prompt industry upgrading or transforming; in order to stimulate country development. By establishing SWF, this capital can be utilized in a more efficient way and get better investment returns.
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Scale
There is no specific stipulation about the basic scale for a SWF. According to the literature research and the cases study, we knew that the scale of SWFs vary from different amount of government revenue to be managed. Like ADIA, the biggest SWF in the world, which has a scale of US $875billion; but KIC of Korean just has a scale of US $24.7 billion.
Then, what is the appropriate SWF scale for Taiwan? I think it should depends on how much does it take for SWF’s investment portfolio, or for the policy of upgrading domestic industry.
Sources
From literature review and cases study, the sources of SWF can be easily divided into two categories: Commodity SWFs and Non-commodity SWFs. Commodity SWFs, like ADIA and Norway GPF, were sourced by exporting natural resources. Non-commodity SWFs, like Singapore and Korea, were sourced by huge foreign exchange reserves.
For Taiwan case, we are the top forth countries with foreign exchange reserves in the world, and just follow behind China, Russia, and Japan. According to the financial statistic data published by Central Bank of the Republic of China (Taiwan), the foreign exchange reserve is US $350 billion as Jan. 2010, which was about 91% of Taiwanese GDP. Therefore,
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the foreign exchange reserves can be a good source, and the quantity of the capital is absolutely enough.
There are some commentators who claim that Taiwan is not one of the IMF member countries and needs to store more foreign exchange reserves to prevent the attacks from international hot money. Nevertheless, this increasing amount of foreign exchange reserve (see Figure 26) is still enough to set up SWF without violating CBC’s management philosophy of its foreign exchange reserves--- “The CBC’s management philosophy of its foreign exchange reserves centers around liquidity, security, and profitability. The foreign exchange reserves have also been used to promoting economic development and industrial upgrading.”55 Furthermore, to utilize foreign exchange reserves via setting SWF to promote industrial upgrading is one of the ways to fit CBC’s management philosophy.
Figure 26. Taiwan foreign exchange reserves56
55 CBC website, http://www.cbc.gov.tw/np.asp?ctNode=444&mp=2
56 Arrange from CBC’s publish financial statistic data 0
Jan‐02 May‐02 Sep‐02 Jan‐03 May‐03 Sep‐03 Jan‐04 May‐04 Sep‐04 Jan‐05 May‐05 Sep‐05 Jan‐06 May‐06 Sep‐06 Jan‐07 May‐07 Sep‐07 Jan‐08 May‐08 Sep‐08 Jan‐09 May‐09 Sep.‐09 Jan‐10
Taiwan Foreign exchange reserves (million)
Foreign exchange reserves (million)
Source: CBC website
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Here, I will use Greenspan-Guidotti Rule to demonstrate that Taiwan foreign exchange reserves is absolutely enough for setting up SWF without worry about national economic security. According to Greenspan-Guidotti Rule, in order to prevent financial account crisis for a country, the foreign exchange reserves should sustain enough to cover short term external debt (due within a year).
From Table 14, we know that after considering the short term external debts, the Central Bank of Taiwan still hold $293 billion dollars as excess foreign exchange reserves. The foreign exchange reserves is over 8 times of short term external debts; this number is way to over optimal level. Therefore, Taiwanese do not need to fear that using foreign exchange reserves will trigger Taiwanese financial account crisis.
Table 14. Taiwan excess foreign exchange reserves via Greenspan- Guidotti Rule (2009 Q3, unit: $bn)57
Foreign exchange reserves
(A)
Short term external debts (due within a year) (B)
Excess foreign exchange reserves (A)-(B)
Foreign exchange reserves/
short term external debts (A)/(B)
Optimal level = 1.0
332.239 38.75 293.489 8.57
Source: CBC website, Joint External Debt Hub (JEDH) Database
57 CBC website: http://www.cbc.gov.tw/ct.asp?xItem=1866&ctNode=511&mp=2 Joint External Debt Hub: http://www.jedh.org/jedh_dbase.html
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Another criterion to make sure foreign exchange reserves is enough for a country to protect its current account safety is: the foreign exchange reserves withhold should support at least 3 to 6 months import value. For conservative measurement, I take 6 months import value to measure how much excess foreign exchange reserves Taiwan holds.
As Table 15 shows, after deducting 6 months import value from foreign exchange reserves, Taiwan still hold US $253.5 billion dollars as excess foreign exchange reserves.
This number ensures that Taiwan foreign exchange reserves is quite enough for another use without the risks for current account security.
Table 15.
Taiwan excess foreign exchange reserves under the criterion that foreign exchange reserves withhold should support 6 months import value (end 2009, unit: $bn)58 Foreign exchange reserves
(A)
Average 6 months import value (B)
Excess foreign exchange reserves (A)-(B)
348.198 94.70 253.498
Source: CBC website; Ministry of Finance, R.O.C. website
In some reports, Taiwan National Stabilization Fund was classified as SWF; however, in my opinion, it is not SWF and neither appropriate to transfer into SWF. Taiwan National Stabilization Fund was set up in 1999 with scale about $500 billion NTD. Its intention is to
58 CBC website: http://www.cbc.gov.tw/ct.asp?xItem=1866&ctNode=511&mp=2
Ministry of Finance, R.O.C. website: http://210.69.109.17/njswww/jspproxy.aspx?sys=100&funid=defjspt2
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secure Taiwan stock market from turbulence; therefore, National Stabilization Fund is essential to maintain its independence from other function. The nature of SWF is to seek higher investment return and promote country development; that means SWF should take higher risks. As security function that National Stabilization Fund positioned, it cannot endure high risky investment policy. Furthermore, if we take National Stabilization Fund as SWF, or part of them, it may hurt the security function and harm Taiwan stock market harder when SWF get investment loses. Therefore, I think foreign exchange reserves is the best sources for funding SWF.
Investment Policy
From cases study, when selecting investment targets, SWF companies may tend to choose the industries that they are familiar with or they want to develop with. For example, Norway GPF selected energy; telecommunication; and health care industries as their major investment objectives. Those three industries are prosperous and famous in North Europe area. Singapore GIC selected finance and real estate industries as their major investment objectives, since Singapore had no natural resources but abundant excellent human resources.
It is their chance to utilize SWF developing itself as financial centre in Asia. China CIC invested in global financial institutions so far since they are not really expert at any fields.
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Then, what objectives should be invested in if Taiwan SWF really established? What are the investment industries? Should we invest domestically or overseas? What’s the best SAA for Taiwan SWF?
Generally speaking, it is a more conservative and safe way to diversify investment portfolio not only industrially but also geographically. However, if Taiwan SWF positioned itself as a strategic SWF to promote Taiwan industry upgrading, I will suggest that it would be better to put more weights on domestic investments. The objectives choosing should follow government industry policy, to invest capital in the future blue-chip industry, such as science and technology industry, biotechnology industry, or even tourism industry.
On the other hand, Taiwan SWF can also learn from famous global SWFs, like Norway GPF and Singapore GIC, to invest in those industries that Taiwan familiar with or good at. By investing in industries that Taiwan familiar with, it can reduce the investment risk as well.
Take Cloud Computing Technology for example. This is a popular issue in IT industry these days. Cloud Computing Services Industry represents the huge business profit potential and market in the future. Taiwan has its advantages to promote Cloud Computing Services no matter on creativity in software or on productivity in hardware. On April 7, 2010, Taiwan Clod Computing Industry Alliance was established to develop three Cloud Service Applications: Infrastructure, Platform, and Application. Cloud Computing Technology could
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be the next blue-chip industry for Taiwan, and we could utilize the capital of SWF, it is not impossible for Taiwan to be the next Singapore.
Governance
In governance aspect, in order to eliminate the worries from investee countries, every SWF legislate regulation and supervision mechanism to make themselves as independent entities. Also, having a clear responsibility distribution among the whole SWF entity is vital element to make it operates efficiently. From successful experiences of SWFs (Norway and Singapore), it is a good way to manage SWF via entrusting relationship: managers and clients.
However, it is obvious that the transparency of SWF is still the most critical issue at the moment. Like ADIA and CIC cases in the study, we can just gain barren information from their website. If investee countries know more about their SWF investors, they have less worries and obstruction accepting investment activities.
For governance issue in Taiwan SWF, we should ask some question first: Who should manage SWF? Who has the ownership of the assets? Is there any need to hire external managers?
From the cases in previous chapter, it is known that separate the assets’ ownership and managerial authority is a common way to ensure the independence and autonomy of SWF.
The advantage of this way is to eliminate the political color from SWF investment activities
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and make SWF operated more efficiently. For Taiwan environment, political issue is always an unstable element for any policy or action. Therefore, it is a good way for Taiwan to establish another company to manage the assets of SWF which were entrusted by government, and make sure the independence and the neutrality of this company.
About the professional funds manager issue, my suggestion is to let external funds managers stand an appropriate proportion in all managers. From the lousy performance of many Taiwanese government funds (e.g., Taiwan National Stabilization Fund, Pension Fund, and Labor Insurance Fund…etc), it is obvious that the professional funds managers can operate the funds more efficiently. Also, by cooperation with professional external managers, it can help Taiwanese government cultivate more talents, and prompt transferring know-how from international financial market to domestic market.
About the regulation issue, having an explicit regulation is significant to ensure SWF can run well. What Act should SWF abide by? How can SWF preserve its autonomy? How to make a good monitor mechanism? How to legislate the rule to stipulate the responsibility?
The advantage of having a specific regulation to stipulate SWF is to have a clear rule for details (including the responsibility of entrust relationship), and it can also show the importance that how government regard SWF. However, it may hard to do since legislating process needs time and money. In my opinion, it would be necessary to make the specific regulation about Taiwan SWF, but before the rule was created, the more efficient and
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temporary way is to use the existing rule (e.g., Banking Act, Corporation Act…etc), and add additional necessary rules to strengthen it. Meanwhile, from the cases, it is showed that the bottom-up periodic report mechanism and the up-down authorization system is a pretty thoughtful legislative framework. And this report mechanism is the most important part which should be considered when making the SWF regulation.
Most importantly, all these regulations should be implemented under an honest and trusting government and entity; and this is also what Taiwan should work for.
To sum up all the suggestions above, let us come back to the original question in this study--Is Taiwan appropriate to set up SWF or not? In my opinion, the answer is yes. Taiwan definitely has the capability to establish its own SWF, and the whole society will benefit from it. But there are two most important things to think about before setting up SWF, which are:
(1) ascertain the purpose and the intention for funding SWF, and (2) make sure all the relative regulations be done and can be implemented by an integrity entity or government. Only when Taiwanese government takes preparation well beforehand, the advantages of SWF can be seen completely.
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