TAIWAN STOCK EXCHANGE OFFICIALS DOWNPLAY IMPACT OF

UNCLAS SECTION 01 OF 02 TAIPEI 000577 SENSITIVE SIPDIS STATE FOR EAP/TC E.O. 12958: N/A TAGS: CH ECON EFIN ETRD PGOV PREL TW SUBJECT: TAIWAN STOCK EXCHANGE OFFICIALS DOWNPLAY IMPACT OF CHINESE PORTFOLIO INVESTMENT TAIPEI 00000577 001.2 OF 002 Summary -------------- ¶1. (SBU) Taiwan opened its securities markets to Chinese institutional investors in early May, but the Taiwan Stock Exchange (TSE) is not expecting a large influx of portfolio investment from China anytime soon. Senior TSE executives tell AIT that the biggest impact of loosening Taiwan restrictions on investment from China is a boost to local and foreign investor sentiment. Over the next few years, the TSE,s growth strategy focuses on launching a number of exchange traded funds (ETFs) to attract local investors who wish to play overseas markets and employ more complex investment strategies. End Summary. Taiwan to Allow Portfolio Investment from China -------------- -- ¶2. (U) Taiwan,s stock market is up 40% so far this year and has risen more than 13% since the conclusion of the most recent cross-Strait talks on April 26. One heralded outcome of these talks was the announcement by Taiwan that it would, for the first time, permit direct and portfolio investment by Chinese investors in Taiwan. Shortly after the talks, Taiwan,s Securities and Futures Bureau published new rules that allow some Chinese investors to invest in Taiwan securities. ¶3. (U) The regulations remove a blanket prohibition on Chinese investors in Taiwan securities markets, but even under the new rules, Chinese portfolio investment activity is strictly limited. Only four categories of Chinese investors are allowed: --Chinese qualified domestic institutional investors (QDIIs), --Chinese employees of a Taiwan firm (and they are only allowed to hold stock in their employer firm granted to them by their employer), --Chinese holding equity in foreign firms listed in Taiwan, and --any others designated by the SFB (none designated yet). ¶4. (U) Taiwan still does not allow individual Chinese investors, except for the limited exceptions above, to participate in Taiwan markets. The QDIIs also still face significant restrictions on their Taiwan portfolio investment. The new regulations limit the amount of funds invested in Taiwan to 3% of their total assets. This limit will be raised to 10% after China and Taiwan sign an MOU on financial sector regulation and supervision. China has yet to approve QDIIs investing in Taiwan, also pending signature of an MOU. ¶5. (U) Taiwan,s regulations were crafted to guarantee that Chinese investors do not gain control of the entities in which they are investing. Chinese investors in aggregate are limited to a 10% stake in any listed company, unless approval is granted by Taiwan,s Investment Commission. Rules also state that Chinese investors will not be permitted to gain "control" or "management" authority over any listed company. A Chinese investor is not permitted to be elected to the board of directors. Although Taiwan will allow Chinese investors to buy and sell equity shares, global depository receipts, mutual funds, government and corporate bonds, warrants and other securities, they are not permitted to engage in margin trading, short sales, lending or providing loan guarantees. TSE Not Counting on Chinese Investors -------------- ¶6. (SBU) Two senior executives at the TSE told AIT they did not believe Taiwan equity markets would see an influx of Chinese investment anytime soon. They pointed out that individual investors are still barred from investing in the markets here and noted the restrictions on QDII investments. They also argued that PRC regulators were more cautious than their Taiwan counterparts and would likely prevent Chinese investors from putting "too much money" into the Taiwan market. The real impact of Taiwan,s opening to Chinese TAIPEI 00000577 002.2 OF 002 investment, they said, would be the improvement of overall sentiment which should help generate interest by local and other foreign investors in the Taiwan market. ¶7. (SBU) With this analysis, the TSE was not focusing on attracting Chinese investors, but instead on trying to attract more Taiwan and foreign (non-Mainland) money by trying to list a broad range of exchange traded funds (ETFs) on the TSE. Over the next few months the TSE will seek regulator approval and agreements with a number of foreign exchanges to list ETFs representing a variety of foreign stock indexes, including indexes in China and Hong Kong. They also hope to offer ETF derivative products which would allow local investors to place long and short bets on the market or a particular sector or basket of stocks. The TSE currently lists 11 ETFs and hopes to have a total of 30 ETFs trading by the end of the year and as many as 100 within three years. The executives note that unlike Hong Kong and some other exchanges in the region, most trading in Taiwan is driven by local retail investors, and ETFs are most suited to individual investors. ¶8. (SBU) Comment: Although these restrictions on Chinese investors currently in place will likely be further loosened over time, our TSE contacts still do not believe that material amounts of portfolio investment from China will enter Taiwan anytime soon. Their attitude reminds us that the hype may be ahead of the reality on the ground. End Comment YOUNG