Taipei Times: The private sector has high hopes for your commission, which operates as an umbrella organization to oversee the nation's banking, insurance and securities sectors. What makes you qualified for this new post?
Kong Jaw-sheng (
It appears that my past work performance [at foreign banks], personality and integrity had earned their trust in the first place. But I also believe that my professionalism and international perspective are what they see about me, that they hope may help me re-engineer the nation's financial regulatory system.
TAIPEI TIMES FILE PHOTO
Though I am a freshman in terms of politics, I also have no political baggage and have a liberal attitude about pushing forward the ultimate goal of developing Taiwan into an Asia-Pacific regional financial-services hub.
In order to meet that goal, we must make breakthroughs over the next two years and remove obstacles, such as past failures to conform with international practices and national security concerns, that have hindered the development of local financial industries.
TT: Your past work experience with foreign banks might have been one of the key elements for you to outperform other potential candidates and win the post. How will the commission benefit from your financial connections?
Kong: I plan to follow the example of financial regulatory boards in countries such as Japan and England, and set up an international advisory board under the commission. I'd like to recruit some very well-known international financial gurus, such as Tony James, the vice chairman of the Blackstone Group -- a leading investment bank -- and William Donaldson, chairman of the US Securities and Exchange Commission to advise on Taiwan's financial regulatory reform. Both of them are good friends of mine, and I am sure they are willing to offer me some private advice, at the least [Editor's note: As SEC chairman, Donaldson is the chief regulator of US securities markets and the chief enforcer of securities laws]. Also, I hope to find the time to exchange views privately with domestic bankers including those from locally-based foreign banks and securities houses.
TT: Your commission's month-long investigation successfully uncovered Procomp Informatics Ltd's (博達科技) fraud, before you vowed to facilitate legal revisions, reinforce corporate governance principles and to set up an early-warning system in order to prevent similar crises from happening again. But how many similar time bombs are out there, that have escaped the commission's radar and may soon burst?
Kong: Let me first clarify this matter by saying that my commission is empowered with the right to examine and investigate financial crimes, but which are, nevertheless, under the court's jurisdiction. That's why [three of] our staffers from the bank examination bureau are collaborating with prosecutors to crack the case.
The court may not be familiar with the causes of financial and economic irregularities. After we present to the court our analysis of Procomp's financial crime beyond a reasonable doubt, we've done our duty, and we can't do anything more -- including leaking details of the analysis to the media. We just have to wait for the court's verdict.
As for the early-warning system to monitor for financial irregularities, the commission will soon enhance its capability to carefully study financial portfolios and the minutes from shareholders' meetings of all listed companies, which have long been required to send copies of these things to regulators for record-keeping. In other words, we'll forsake the past practice of "formality review" and make a more proactive effort to detect suspicious clues early on, such as abnormal inventory volumes and irregular transactions made through false accounts, which may later point to criminal conduct. I highly encourage our staffers, who did a brilliant job this time with Procomp, to not only work hard, but also work smart.
TT: As a seasoned banker with experience over the past decade at various international financial institutions, what's your view of Taiwan's financial sector?
Kong: The advantage of the local financial sector heavily hinges on the nation's manufacture-oriented economy powered by both high-tech and traditional industries. Secondly, Taiwan is a capital-surplus country, which sets a very good pre-condition for the nation to develop its capital markets. Also, our highly-educated financial talent, as well as the government's commitment and support in developing the financial markets, are also a positive driving force.
Our disadvantage, however, is our legal system and practice, which is based on a Chinese legal system, while our finance laws are supposed to be based on an Anglo-American system. The gap between both legal systems spells trouble. For example, a territorial tax system fails to safeguard investors' rights, since only capital gains should be taxed. Moreover, the nation's financial talent is not internationalized enough to envision bigger financial pictures, let alone to overcome the outdated regulatory culture and mindset.
TT: In their report released earlier this year, financial advisers from McKinsey & Co, cited Taiwan, South Korea, Hong Kong and Singapore as potential financial-service hubs in the Asia-Pacific region. Can Taiwan outperform other Asian countries and leap to become the region's financial leader in the near future?
Kong: In comparison with other Asian competitors, Singapore is a highly open yet small market, which no service industries bolster. Some 15 years ago, Singapore planned to take advantage of five ASEAN countries to support its financial-market development, but failed, since these five countries underwent their own industrial development.
The market in Singapore is a limited one, although it has got the upper hand in financial derivatives and foreign exchange businesses. Hong Kong used to be a financial powerhouse, with the advantage of a strong market force and less government interference. However, after it was returned to China in 1997, things have changed negatively and impacted its financial freedom. So, I think Taiwan is better positioned to upgrade its financial markets, following a series of government-initiated reform measures that must still be launched, while stressing the importance of market self-discipline.
The commission is determined to impose more professional responsibilities on accountants, underwriters and lawyers, who shouldn't neglect their duty to prevent financial scandals. But doing so will force them to provide better services and, maybe, allow them to charge higher fees, which will end up generating more reasonable profits.
Once the local financial platform is greatly improved, Taiwan may become an attractive market for multinationals to raise capital by issuing euro convertible bonds (ECB), American Depository Receipts (ADR) and Global Depository Receipts (GDR) here, thereby facilitating the nation's financial importance as a regional funding center.
TT: What are Taiwan's fundamental advantages and disadvantages, sector by sector?
Kong: Facing the over-banking problem, the nation's banks are stifled in over-heated price competition, which generates no reasonable profits to support their viability. Without financial support, banks also lack the willingness to nurture financial talent, who will focus on developing innovative products, and therefore, saturation has ended up weakening the nation's financial competitiveness locally and internationally.
So, our priority is to facilitate an "exit system," which resorts to the market mechanism and forces ill-performing banks out of the market.
Before achieving the goal of transforming Taiwan into a regional financial hub, we aim to help expand at least one to three domestic banks, insurers and securities houses into regional key players. In the insurance sector, for instance, we will address measures to encourage as many new investment-oriented insurance products to hit the market as possible, as long as risks are taken into consideration while stabilizing the sector's insurance management to ensure a reasonable profit base.
As for the securities sector, the nation's capital market can't isolate itself from its international counterparts any longer.
Taiwan has to incorporate international standards, enhancing financial transparency and deregulating restrictions on the capital markets so as to bring in international participation. That's why I've been reiterating that the essential regulatory change initiated by the commission will be allowing more flexibility in legal revisions, while strengthening law enforcement, which is counter to past practice.
TT: To facilitate an "exit system" that works, the passage of the Financial Restructuring Fund (金融重建基金) should be accelerated and its size be fully expanded as the finance ministry previously insisted. But given the current political standoff in the legislature, the bill appears to be put on the back burner. How do you plan to make a breakthrough?
Kong: The government has vowed to use the fund to bail out the nation's defaulting banks, whose assets have turned sour. However, I wish to minimize the fund's size so as not to waste taxpayers' money.
To achieve that goal, the commission will soon formulate strategies that encourage domestic banks to make alliances with foreign players via joint ventures or strategic partnerships, to acquire controlling stakes in distressed banks at a premium. This will be the best method for the government to save taxpayers' money.
However, after the fund is terminated next July, the nation's central deposit insurance system will soon change from providing full coverage to covering only the insured, which will lead to a scenario -- driven by market forces -- in which depositors will carefully choose to make deals with reputable banks, and will leave ill-performing banks behind.
As for the plan to bail out distressed banks, now, this is what I specialize in. I plan to set up a special task force to locate potential international buyers that are interested in taking over local distressed banks or restructuring their impaired assets. The solution can also work for the future consolidation plan for state-owned banks since the DPP government has vowed to lower its stake in state-owned banks to below 20 percent in 2006.
TT: As a policymaker, what strategies would you recommend the Cabinet and the Ministry of Finance to do so as to carry out their goal of lowering their stake in state-owned banks?
Kong: Commercial banks in Taiwan may not be attractive to foreign buyers. But I am aware of two European [financial holding] companies and some other American [holding] companies, which may be interested in acquiring a local branch to act as their base in Asia-Pacific markets. These foreign companies have expertise in maximizing corporate enterprise value after they acquire local [private or state-owned] banks while creating a win-win situation that helps the local banking sector's consolidation.
Also, by 2006 there may be several local financial holding companies whose size will be big enough to render them capable of acquiring state-owned banks if they need to increase their number of branches. In terms of share sales, there are many alternatives for the finance ministry to release its shares in state-owned banks. Shares can be either sold to investors in the public markets or via auctions by locating private investors.
TT: The private sector has been urging the government to allow China-based Taiwanese companies to list on the local bourse, since Taiwan aims to become a capital-raising center. They've also asked the government to relax an investment cap, which stipulates that only 40 percent of funds raised in this country can be invested in China. Will you address the issue soon?
Kong: As far as my financial agenda is concerned, the issue enjoys no priority. My priority now is to restore investors' confidence in local markets and push forward reforms to achieve market improvements, so that China-based Taiwanese companies or foreign investors will be interested in coming to Taiwan.
I understand that the premier has promised the private sector he would clarify the government's stance on this issue soon. But I think it'll be better if the government talks to the private sector after it comes up with feasible measures to address the issue. Or else the government may come under fire by both pro and con sides.
Despite the fact that the commission is charged with regulating capital markets, we're not the sole policymaker on this issue, which touches upon politically sensitive cross-strait and national security matters. Therefore, coordination between the commission, the Mainland Affairs Council and the National Security Council is requisite before the policy can be finalized.
Actually, an easier solution would be the facilitation of the issuance of Taiwan Depository Receipts (TDR), which will serve a similar purpose, although it means something different. I agree that Taiwan is home country to many Taiwanese companies operating abroad, which certainly should be allowed to list in their home country. But we need more time to formulate feasible listing measures to attract potential blue-chip companies to list on the TAIEX. A better time to address this issue practically may be next year [Editor's note: Facing increased concern over that proposal, Kong last Friday said that his commission had delivered a proposal to the Executive Yuan, although he didn't give a time frame for implementation of the listing plan].
TT: China is slated to open its financial markets after 2006 in accordance with commitments made when it joined the WTO. Do you foresee a window of opportunity for local financial-service providers or a negative impact on the local financial market?
Kong: China's open-door policies mean both challenges and opportunities to me. That's why I hope to help Taiwan get ready within the next two years. We can't ignore Chinese markets if our goal is to become a regional financial hub in the Asia-Pacific region.
Taiwan missed two chances to further upgrade its financial sector in the past 10 years -- one was in 1995-1996, when the government talked about the idea of developing the nation into a regional financial hub, and another opportunity was in 1998 when Asia encountered a regional financial crisis. But we missed these two opportunities and I feel sorry about that. If we could have made Taiwan a regional financial hub at that time, we wouldn't have seen Shanghai develop so fast in the past few years.
Success in the nation's financial sector hinges on three conditions -- government commitment and support, quality manpower and system development. China may see a fast catch-up in talent nurturing but it remains a long way for that country to develop a modern system, as its financial system remains backward.
Anyway, Taiwan can't afford to be marginalized and to lose market share to China, but many bankers may have unrealistic fantasies about Chinese markets. Historically speaking, China faces a small economic setback every five years and a big setback every 10 years. The reason for this is because of its economic system, which is not as sophisticated as ours. So put it this way: China is not as good as we often think, while Taiwan is not as bad as we expect.
Some foreign banks have said that they want to use Taiwan as a springboard before entering the Chinese market. To me, that concept is more viable for commercial banks, asset management companies and investment trust firms, but it may not apply to banking underwriters, because underwriting involves personal networks. Nonetheless, if we can move to develop Taiwan into a regional financial service center with our efforts winning recognition from international players, there's no reason for us to belittle ourselves.
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