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Taiwan’s Financial Markets: A Path to Reform
Challenges and Reforms
As Taiwan’s economy continues to grow, its financial markets have been facing numerous challenges in recent years. In an effort to address these issues, the government has implemented a series of reforms aimed at promoting market efficiency and stability.
Foreign Currency Funds Shortage
One of the key obstacles to Taiwan’s financial development is the lack of foreign currency funds among banks. According to a report by the Central Bank, this shortage was partly due to banks’ reluctance to hold large amounts of foreign currency reserves.
To address this issue, the authorities have taken several measures to liberalize the stock market and promote foreign investment:
- Permission was granted for foreigners to invest indirectly in the local market through beneficiary certificates issued by local securities companies (1983)
- A two-phase computerization process was completed in 1985 and 1988, allowing for more efficient trading
- The government increased the percentage limit on daily fluctuations in stock prices to reduce exchange rate risk
Promoting Foreign Investment
In recent years, online link-ups have been established between local money brokerage houses and large international money brokers in Singapore, Hong Kong, and Japan, further promoting foreign investment.
Market Stability and Investor Confidence
To address concerns about speculative behavior among individual investors, who account for over 90% of share transactions:
- The government increased the percentage limit on daily fluctuations in stock prices
- Measures were taken to reduce exchange rate risk
- Seed funds were provided to foster the development of the market
Other Reforms
In addition to these measures, the interbank NT dollar call-loan market was established in 1980, allowing banks to adjust their reserve positions. However, in 1994, the Central Bank ordered securities finance companies to withdraw from this market due to concerns about stock market speculation.
The electronic funds transfer system was also established in May 1995 to promote transactions and improve payment efficiency. Business tax on interbank call loans denominated in NT dollars or foreign currencies was abolished in September 1995, conforming to international practice.
Future Directions
Despite these efforts, the sources of funds in the market remain concentrated among two large state-run banks, the Bank of Taiwan and the Taiwan Cooperative Bank. To address this issue, the authorities must deal with institutional problems and promote market efficiency and stability.
The interbank foreign currency call-loan market was established in 1989 to provide a platform for banks to adjust their foreign exchange reserves. However, during its early stages, foreign currency funds were often in short supply due to banks’ reluctance to hold large amounts of foreign currency reserves.
Conclusion
Taiwan’s financial markets are undergoing significant reforms aimed at promoting efficiency, stability, and investor confidence. As the government continues to address institutional problems and promote market development, Taiwan is poised for continued economic growth and prosperity.