I. Tech Giants and the Taiwanese Financial Market
On October 23rd, 1961, the Taiwan Stock Exchange (TWSE) was officially established, opening later On February 9th, 1962 - the establishment of the TWSE was in large part to manage unsound and unregulated brokers of land bond certificates, who had few ways to be held accountable for prior to the inception of the TWSE. The TWSE’s establishment came just north of a decade after the KMT’s start to its rule over Taiwan, and was thus created as a means to inject momentum into Taiwan’s growing economy as more types of securities began to be established from the initial government land bonds. The frontrunner of Taiwan’s economic growth would then be founded on February 22nd, 1987: Taiwan Semiconductor (TSMC), going public on the TWSE on September 5th, 1994. TSMC defines Taiwan’s industry trend, integrating the island into the vast expanse of the global supply chain. As the manufacturer of high-quality semiconductors, TSMC products would be used in products from cars to laptops, with other companies like NVIDIA requiring the computer chips to create familiar and widespread AI tools. Taiwan’s specialization in semiconductor manufacturing sets its chips apart from other countries - over 60% of chips in global circulation are Taiwanese-produced, and 92% of the most sophisticated chips, defined as chips constituting those of sub-3 nanometers, are manufactured by TSMC, with the other 8% manufactured by other semiconductor producers in the Netherlands and South Korea.
Taiwan’s strength in semiconductor manufacturing comes from the fact that the manufacturing process can fully occur on the island. With access to silicon and other various processed materials that are imported in, Taiwan’s facilities are fully able to manufacture the chips to completion before sending them on their way to other countries, primarily Southeast Asian ports, to be shipped out and integrated into the global supply chain. Yet, Taiwan exercises caution: having the entirety of the manufacturing process occur on the island can incur risk. To mitigate this risk, a TSMC factory is already being constructed in Arizona, and another in Germany helps to serve the EU sector and bring efficiency to the regions that are in need of semiconductor factories. In this case, all players benefit. Most importantly, Japan has already seen TSMC’s establishment in the country, with one having already opened in Kumamoto, slated for chip production by the end of 2024. Also by the end of 2024 is the opening of a second TSMC plant in Japan, with chip production for that factory slated for 2027. Both of these factories are under the Japanese Advanced Semiconductor Manufacturing Company, a TSMC-majority-owned company that brings the supply chain even closer by offering proximity to companies largely purchasing from TSMC such as Toyota and Denso. Japan’s TSMC factories have seen greater investment, as the need for efficiency in creating these chips is more evident by the Japanese production chain compared to that of the United States.
With a market capitalization of $751.92 billion USD (as of July 2024), it became exemplary of Taiwan’s meteoric rise of Taiwan’s economic growth. Yet, tech manufacturing as an industry is not enough to grant Taiwan full-fledged economic security. To do so, market diversification must occur. For six years, then vice-president, now president, Lai Ching-te has encouraged an 8-point comprehensive plan by the Economic Development Council of the Executive Yuan in order to stimulate Taiwan’s economic growth. The priority was to shift Taiwanese industry away from solely manufacturing computer chips to putting Taiwan on the stage of asset management. Yet, implementation will be no easy task - perhaps the largest obstacle will be balancing a tightrope of mainland Chinese investment while being aware of potential security risks. To do so, a lesson out of Hong Kong’s playbook can be taken, so long as Taiwan remains wary of the reason as to why Hong Kong’s status as a financial hub is dwindling as well as formidable financial competitors in the sector.
II. Contenders of Hong Kong’s Post-Financial Dominance Era: Taiwan, Singapore, and Japan
Hong Kong has long been established as a center of commerce in the Indo-Pacific region. Its location at the mouth of the Pearl River grants access to the open waters of the Pacific, while being close enough to larger cities such as Guangdong to transport and facilitate trade. In addition to being in a prime location of commerce, British financial standards have set the pace for Hong Kong for reputable financial firms to grow, particularly in fields such as accounting (auditing, etc.), consulting, or investment banking. These standards include oversight of transactions and corporate laws that encourage transparency and incentivize innovation, such as Hong Kong Financial Reporting Standards (HKFRSs).
Yet, Hong Kong’s status as a financial hub is waning. After the handover of Hong Kong to the PRC, a loss of autonomy in the press, speech, and various other forms of political unrest have prompted many international corporations to leave Hong Kong as the labor force (especially foreign employees) began to be less willing to work, with a population growth rate of -0.9% annually as of 2022. If Taiwan wants to secure economic soundness by claiming the top spot for finance in Asia, it must compete with Tokyo and Singapore. Tokyo is already on the way to reclaiming this title - Metropolitan Tokyo governor Yuriko Koike cited three pillars to launch Japan to the top spot: “(1) creating an attractive business and living environment, (2) nurturing players for participation in the Tokyo market, and (3) contributing to solving social issues through finance.” Singapore, on the other hand, is relying on technological innovation to achieve the goals laid out in its “Financial Services Industry Transformation Roadmap.” While it may be difficult for Taiwan to compete with these financial giants, it has a stable financial infrastructure with potential to compete, if the resources are allocated properly.
In the post-Hong Kong era of financial dominance, financial firms must take the initiative to move to an environment best suited for their survival, likely one that reflects the initial freedoms that Hong Kong once had. While Tokyo and Singapore appear attractive, Wall Street and London firms must also remember the importance of technological integration into their business practices. From investment banks to auditing firms, utilizing AI to help conduct financial tasks is imperative, and Taiwan’s already-present tech industry provides for the perfect backdrop for these firms’ operations. Physical proximity provides not only the benefit of efficient sourcing for the tools necessary for financial modeling but also allows close evaluation and quality-checking of these high-value tech companies that may end up on these finance firms’ investment portfolios, in turn increasing the frequency of transactions of Taiwan’s stock market.
III. Making the Case for Taiwan as the next Asian Financial Center
Taiwan sets itself as a state with a promising future in growing its financial sector. This claim rests on two pillars: First, Taiwan has a comprehensive policy framework that would allow the private sector to grow and thrive. Second, Taiwan has a robust set of economic policies and a solid stance in the semiconductor industry that could easily catapult its standing in the international asset management arena. Legislative Yuan Premier Cho Jung-tai, who presided over the Economic Commission Meeting, cited the desire for Taiwan to become an asset management center. Outlined in this goal were three intentions, which were to attract $3 to $4 trillion NTD in domestic and foreign investment, help to support 200,000 AI professionals, and draw in 120,000 foreign employees with AI expertise.
To ensure fair commercial practices, regulations have a major role in any economic ecosystem. Taiwan goes to lengths to ensure that these regulations are made transparent so that firms are able to thrive - in the Regulations Governing Offshore Funds, found in the Financial Supervisory Commission category of the Laws and Regulations Database of the ROC, a set of 59 articles in a set of 5 chapters outline the responsibilities of offshore asset management in Taiwan. Regulations such as these provide for a strong base for the healthy development of foreign investment, with other regulations also catering to the cases of home-grown and domestic investment. Just as in the purpose during the establishment of the TWSE, this type of framework allows investors and owners to be held accountable for various financial activities.
The headquartering of technological companies, not just in Taipei but also around Taiwan, has created a financial infrastructure in which the typical components such as multinational corporations with investors already exist. Thus, Taiwan is already in a strong position to expand its private sector by incentivizing more privatization from economic policies. These include policies that may adhere to incentives to for foreign investment into the semiconductor industry, and later on diversifying the invested industries.
In expanding its financial services sector, Taiwan would be able to leverage its position on the global arena, in which economic growth could help improve its general security. It would also be able to strengthen its financial resilience in the case of economic shocks, especially given its position in a geopolitical hotspot. President Lai has reflected this desire in an outline of policies that drive Taiwan towards a position of being an asset management center through “deepening the sustainable development of finance, promoting popular financial education, growing the asset management sector, and leading fintech.”
IV. Stiff Competition and Weaknesses
Perhaps the most pressing barrier to Taiwan’s ability to reach financial prowess is the inherent issue of cross-strait relations, in two forms: first, the geopolitical threat that erodes the confidence of foreign investors, and second, the degree of Chinese investment in Taiwanese securities that could undermine Taiwan’s national security. Taiwan makes itself marketable in the eyes of foreign investors by asserting that ongoing geopolitical tensions would not lead to the result of Hong Kong, in which investors pulled out due to the handover to the PRC and its tightening authority. To do so, Taiwan ought to maintain its status and continue to bolster its defensive strength to ensure investor confidence. This also comes in the form of reforms to the FSC’s Incentive Policy for Offshore Funds Development in Taiwan, which incentivizes the cultivation of asset management firms in Taiwan through policies such as quicker recognition and adjusting the measurement of asset management firms. This also allows for greater oversight of the level of Chinese investment in Taiwan in order to be careful of how much of a stake they have in Taiwanese securities. Addressing these challenges must be done quickly though, and policies must be passed with haste through the Legislative Yuan.
Cultural phenomena also create a challenge - Taiwanese economic culture, reflecting that of many Chinese and overseas Chinese - tends to be one of savings. Unlike many Western countries, the economic activity of Taiwanese, Chinese, and occasionally other Asian communities tends to stagnate due to a lack of spending as money earned is often put in some form of a savings account. Also on the macro level, Taiwan itself has a similarly conservative banking industry that may overly assess risk and be quite cautious of where money is invested. Thus, it would be in the best interest of Taiwan to be less risk-averse when it comes to financial regulation, laws, and spending in order to bolster its financial sector if it would like to pull ahead of Japan and Singapore.
V. Strengths of Achieving Status as a Financial Center
Even with its high potential to craft a robust financial system that could turn the island into Asia’s next financial center, geopolitical perils will continue to face Taiwan. The challenge thus becomes Taiwan’s navigation of geopolitical tension while being able to diversify its financial market to go beyond simply integration in the global technological supply chain and include other services, beginning with asset management and expanding into financial sub-roles. Financial Supervisory Commission chairman Peng Jinlong has put forth six criteria that put Taiwan en route to becoming a financial asset management center: “First, sufficient professional talents, second, free movement of exchange rate controls, and third, An attractive tax system, the fourth is an easy communication environment such as an all-English environment, the fifth is a flexible organizational structure such as a trust system, and the sixth is geographical location.”
These criteria, by assessment of Taiwan’s resources and infrastructure, are fully achievable but must be done strategically and cautiously so as not to disrupt the status quo that President Lai’s administration would like to maintain with the mainland. Taiwan ought to be able to enhance talents, especially in the financial industry, through enhancing education. Offering scholarships for studies in fields such as finance, accounting, or business analytics incentivizes students to transform Taiwan’s economic outlook. Taiwan also already enjoys a liberalized foreign exchange system, encouraging a free flow of foreign currencies by establishing floating exchange rates and lack of capital controls. Taiwan can utilize this to build upon its financial center capability by incentivizing the creation of a foreign exchange market. Similarly, Taiwan can reform its tax system to cater to private sector expansion, particularly in attracting foreign firms through policies such as tax cuts for certain industries or reducing tariffs on imports from certain countries such as regime-aligned with close geographic proximity or the United States, creating market diversification and appealing to foreign investment. At the same time, Taiwan must juggle the influence Chinese firms or investments have on the island, and precisely collect data so as to be wary of how many Chinese-based assets Taiwanese-based firms are managing. As Taiwan continues to bolster its English bilingual policy, Taiwan will become more attractive as an area for foreign investment and work, creating a good environment for foreigners who can use English as a lingua franca.
VI. Industry Spotlight: Fintech
Currently, financial technology (fintech) serves as the most relevant tool in financial centers and asset management firms worldwide. Finance has been becoming increasingly more quantitative-based, in which overt numeric variables are used to be able to maximize profit. Fintech itself is a broad term that refers to the use of technology to conduct financial R&D or transactions, from predictive modeling to app development. Ernst & Young surveys have concluded that at least 51% of financial firms are planning on developing the fintech sector to become more competitive in the financial field. Thus, if Taiwan were to start somewhere with developing its financial management capabilities, it ought to begin with developing fintech in both the private and public sectors. In the public sector, research into economic policies can use regression models to predict the economic outcome of certain policies. In the private sector, Binomial Option Pricing Models can be used to determine the cost of securities. There are various other means to create financial growth using these tools, and it is up to Taiwan to appropriately fund the development of this area of expertise to compete with the other rising financial heavyweights of Singapore and Japan.
