BUSINESSWEEK ONLINE : DECEMBER 11, 2000 ISSUE
INTERNATIONAL BUSINESS Taiwan's Finance Minister: "We Need to Encourage Consolidation" Yen Ching-chang on the government's efforts to stem a looming crisis in the country's financial sector In the years since the Asian financial crisis began in 1997, Taiwan has largely been spared the economic recession, plunging stock and property values, and loan defaults that have afflicted Japan and Southeast Asia. Now, there are signs that Taiwan, despite its still strong electronics sector and cautious economic policies, is not immune from the Asian infection. Largely due to years of risky loans to companies connected to the Kuomintang party, the country's financial institutions are suddenly in trouble. An official accounting of nonperforming loans (NPLs) puts the total at about 5.6% of GDP, double what it was two years ago. Outside observers put NPLs at as much as 15%. At the center of the storm over Taiwan's suddenly fragile finances is Finance Minister Yen Ching-chang. Business Week Asia Correspondent Frederik Balfour spoke to Yen recently. Edited excerpts from their conversation follow: Q: Some have suggested that there is a financial crisis looming in Taiwan, and it risks making the same mistakes as Japan. Do you agree? A: If you look at what happened in Southeast Asia, it's nothing like that. We have a big trade surplus, huge foreign reserves of more than $110 billion, the government has controlled borrowing, and we've kept growing. However, there are some negatives. At the end of '97, the average nonperforming-loan ratio was only 3.7%. It rose to 5.35% at the end of September for commercial banks, but I don't think we've hit the peak yet. It's higher for nonbank financial institutions -- about 6.25%. Q: The government passed a new bank-merger law on Nov. 25. But isn't more needed to clean up the problems? A: Of course, that alone isn't enough to promote competition. And recently, the government has looked for ways to promote asset quality, such as gradually reducing the gross revenue tax from 5% to 2% and finally eliminating it. This allows banks to use what they save on taxes to write off bad loans. We've also provided a friendly legal environment for asset-management companies [AMCs]. Before, to dispose of nonperforming bank loans, banks had to go to the courts, and the process usually took three to five years. Now they can be [turned over to] an independent third party without using the courts. Q: How quickly can AMCs be set up? A: Within three months, we'll have something. I have recently been approached by a number of foreign companies, including Goldman Sachs and GE Capital. They need to know what partners to have -- though 100% foreign-owned is also a possibility. But the interests of the debtors need to be protected too, so we might need public auctions. I am pushing very hard for the creation of a domestic AMC within three months and prefer two or more AMCs to ensure competition. Q: What about assets nobody is interesting in buying? A: Generally, the commercial banking sector is safe -- I don't include grassroots banking institutions in this definition. The average [of NPLs] is 5.35%, and even though we have a tendency for them to grow, it's still manageable. Looking at grassroots nonbanks, the asset quality is not good. That's the truth, and creating AMCs can't help solve all their problems. The Ministry of Finance knows how much the government needs to spend to solve this problem. Q: How much will that cost? A: We know, but we'd rather keep it a secret. The market share of these institutions is quite small, and we don't consider they would endanger the financial markets. Q: With 53 banks and nearly 360 nonbank financial institutions, isn't the market grossly overcrowded? A: Yes. The three biggest banks have 26% market share. Compare this to other countries and it's very low. And grassroots market share is less than 1% each. We need to encourage consolidation. Q: How many banks is a healthy number? A: I can't answer that. Q: Many foreign institutional investors have complained about government interference in the stock market. What's your response? A: Our market has 83% of daily volume by retail investors. If the composition of our market was like the U.S., with 80% institutional investors, our government would have no rationale to intervene. That market has built in stabilizers. In Taiwan, retail investors create price fluctuations -- that's why we set aside a stabilization fund. But it's only $15 billion, compared with $310 billion market capitalization. Its psychological meaning is greater than the influence that can be performed. Q: Didn't you recently instruct banks to purchase equities to prop up the market? A: Yes. We allow banks to engage in long-term investment, including the stock market. I don't think what we do deserves so much attention. [The media] is trying to exaggerate it. Q: Are you concerned about the present level of the stock market? A: I don't like the high turnover ratio [and the] high concentration of retail investors. The government also needs to pay close attention to levels to maintain investor confidence. Some intervention of the government in the market, at least, needs to be accepted. But I don't think it's fair to utilize the U.S. concept to look at the market in Taiwan. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Defusing a Debt Bomb CHART: Taiwan's Dud Loans: A Mounting Problem ONLINE ORIGINAL: Taiwan's Finance Minister: "We Need to Encourage Consolidation" INTERACT E-Mail to Business Week Online

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