Council for Economic Planning and DevelopmentExecutive Yuan, R.O.C.( Taiwan )

July 15, 2006

TAIWAN’S FINANCIAL REFORMS AND ECONOMIC DEVELOPMENT

TAIWAN’S FINANCIAL REFORMS AND ECONOMIC DEVELOPMENT

The 14th Conference on Pacific Basin Finance, Economics and Accounting

Sheng-Cheng Hu, Chairman

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CONTENTS

I. Introduction

II. Strategies for Developing Taiwan’s Economy

III. Taiwan’s Financial Reforms

IV. Concluding Remarks

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Source: Business Week, May 16, 2005.

“The global economy couldn’t function without it.”

I. Introduction

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Source: Business Week, May 16, 2005.

Taiwan’s Tech CloutWhere the island’s industries rank globallyTaiwanese companies, from chip foundry TSMC to laptop maker Quanta, manufacture thousands of items essential to the global digital economy. Most appear under someone else’s name—and most are made in mainland China Number 1 Provider of

chip foundry services, with 70% of the market worth $8.9 billion.notebook PCs, with 72% of the market worth $22 billionLCD monitors, with 68% of the market worth $14 billion PDAs, with 79% of the market worth $1.8 billion

Number 2 Provider of servers, with 33% of the market worth $1.8 billion digital still cameras, with 34% of the market worth $2 billion

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Taiwan Economy vs Korean Economy

Taiwan Korea

2003 2004 2005 2003 2004 2005

Economic Growth Rate（%）

3.4 6.1 4.1 3.1 4.6 4.0

Per capita GDP in US$

13,327 14,271 15,271 12,652 14,098 16,306

Per capita GDP in US$ on PPP basis)

24,279 26,241 27,572 18,180 19,430 20,590

Unemployment Rate+Inflation Rate（%）

4.7 6.0 6.4 5.2 6.4 6.8

Income Gap 6.1 6.0 - 7.2 7.4

WEF Growth Competitiveness

5 4 5 18 29 17

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SWOT Analysis of Taiwan’s Economy

Weakness

Threat

Strength

‧Rising market opportunities in the

BRICs

‧Rising demand for consumer electr

onics

‧Rise of the BRICs and formation of region

al trading blocs: Hollowing-out (?) and wi

dening Income gap

‧Rising energy prices .

Opportunity

‧Inadequate investment in R&D and infrastructure.

‧Fragile financial system and chronic budget deficits.

‧Weak legal environment and inefficient government operations

‧Rigid labor markets

‧Abundant High Quality Human Resources.

‧Excellent entrepreneurial spirit and R&D Capabilities

‧Solid manufacturing industry base‧SMEs highly flexible in responding to

market changes.

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Conference on Sustainable Economic Development

• Objective:

– Solve long-term structural economic problems to ensure sustainable development of economy

– Per capita income in 2015: US$32000

• Issues Addressed

– Population Aging Issues: Social security and National Health Insurance

– Industrial Competitiveness and labor-market issues

– Financial markets and management of government assets and enterprises

– Global-strategy and Cross-strait issues

– Efficiency of the government sector

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Encouraging R&D clustering Strengthening industrial clustering effect

II. Strategies for Developing Taiwan’s Economy

Take advantage of new business

opportunities

Stepping up global positioning Promoting the development of free ports

Policy focus Measures

Forge Competitiveness

in Industrial sector

Ensuring adequate supply of industrial landProviding assistance in fund raising and technology

developmentStrengthening the nurturing of science and technolo

gy manpowerFiscal and financial reform

Stepping up science

Stepping up technology R&DCreate innovalue

Build up a sound environment for

Investment

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Objective

Improve the competitiveness of the financial services sector, and develop Taiwan as a regional financial service center

• Regional fund raising center• Regional asset management center

III. Taiwan’s Financial Reforms

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SWOT Analysis of Taiwan’s Financial Markets

Weakness

Threat

Strength

New pension fund system helps develop asset management business

Vigorous capital market paves the way for developing Taiwan as a Regional Financial Services Center

Facing competition from international conglomerates Need for strengthening and integration of regulatory environment in step with financial sector development.

Opportunity

Relatively small scale of individual financial institutions Limited liberalization of financial market Too many state-owned banks Lack of experience of cross-selling and internationalization Synergy needs to be improved Insufficient financial professionals

Transnational enterprises will need more financial services

Higher foreign exchange reserves, and less external debt

Abundant capital of overseas Taiwanese

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Strategies for Financial Reforms

• Clean up non-performing loans• Develop sound investment climate through

deregulation and financial liberalization • Strengthen financial supervision• Improve corporate governance by requiring greater

transparency and corporate board independence.• Privatization and private management of state-

owned banks• Promote financial consolidation and speed up M&A• Building a competitive financial taxation

environment in line with international practices.• Strengthening risk management and promoting

financial discipline and information transparency.

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％

2001 2002 2003 2004 2005 2006

banks’ Lending and Investment Growth

Main Achievements

1. Decreasing Domestic Banks’ New NPL Ratio

New NPLs Ratio

％

2.53

11.27 11.7410.79 10.17

8.85 8.607.97 7.87

6.08 5.72

4.94.52

3.8 3.66

3.24

2.78 2.24

2.46

-5

-3

-1

1

3

5

7

9

11

13

12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 5

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2. De-regulation

Facilitating Financial Market Consolidation

14 financial holding companies (FHCs) have been established since the end of 2001. Since September 2004 there have been 18 mergers and acquisitions among our financial institutions, with particularly good results in the consolidation of state-owned banks. This has reduced the number of financial institutions in which the government holds a stake from twelve to six .

Broadening market access and attracting foreign investment

The abolishment of the 12-year-old QFII system in September 2003 meant that Taiwan’s stock market was fully opened to foreign investment.

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Total Accumulated Net Inward Remittance

3. Enhancing the Confidence of Foreigners

121.5108.9

80.166.3

43.041.4

31.422.911.19.39.06.34.3

0.0

40.0

80.0

120.0

1994 1996 1998 2000 2002 2004 May-06

Abolished the screening system for qualified foreign institutional investors (QFII)

Source: FSC

Unit: US$ billion

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4. Enhancing The Participation of Institutional Investors

26.828.822.520.9

16.815.613.911.810.29.310.78.16.5

0

10

20

30

40

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 May-06

Source: FSC

The Proportion of Institutional Investors’ Trading Value on TSEC Market(%)

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5. Improving Asset QualityA substantial improvement in the profitability of Taiwan’s banks is likely to be further strengthened by the industry’s improving asset quality.

Basic Financial Data on Taiwan’s Banking System (%)

End of

Year

1998 1999 2000 2001 2002 2003 2004 2005 2006(1~4)

ROA 0.60 0.50 0.48 0.27 -0.48 0.22 0.63 0.30 0.12

ROE 8.00 5.90 6.19 3.60 -6.93 3.52 10.30 4.81 1.95

CAR 10.58 11.17 10.75 10.40 10.63 10.07 10.67 10.34 ─*

ROA = Return on total Assets.ROE = Return on stockholders’ Equity.CAR = Capital Adequate Ratio.* : released per half-year Source: The Financial Supervisory Commission

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Stocks held by foreign entities

Source: Financial Supervisory Commission, Executive Yuan.

30.58%May 2006

31.67%Apr 2006

22.18%Dec 2004

30.25%Dec 2005

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21

23

25

27

29

31

33

92004

11 12005

3 5 7 9 11 12006

3 5

% of total market capitalization

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The government’s main targets for Taiwan’s economy in 2006 include a GDP growth rate of 4.5%, the CPI to rise no more than 2%, and the unemployment rate to stay below 4%.

Through the innovative development of manufacturing and services sectors, Taiwan’s nominal per capita GDP expected to double from US$16,000 in 2006 to US$32,000 in 2015.

The goal of Taiwan’s financial reforms is to develop Taiwan as a regional financial center through the efforts of liberalization, privatization and consolidation.

Successful privatization and consolidation requires an open and transparent process and is based on sound financial supervision and corporate governance.

Ⅳ. Concluding Remarks

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＆

THANK YOU!