In mid June, Premier Yu Shyi-kun met with the President of the Legislative Yuan, Wang Jin-pyng, to urge him to call a special session of the legislature because the legislature had passed so few bills in its most recent regular session. Legislators from the ruling party also pushed for the special session, which, under pressure from the public and at the urging of the financial community, finally got underway on July 8. Three consecutive late nights of work later, legislators had succeeded in passing four economic and financial reform measures.
The six measures proposed by the Executive Yuan were basically of two types. The first consisted of reforms to the nation's financial system, as well as measures to protect that system's stability. These included the Organic Law for the Executive Yuan's Financial Oversight Committee, the Agricultural Finance Law, the Real-estate Securitization Statute, and the amendments to the Statute Governing the Financial Reconstruction Fund. The other type concerned building a more liberal trade and business environment and consisted of the Statute Governing the Establishment and Management of Free Ports and amendments to the Statute Governing the Relations Between the People of the Taiwan Area and the Mainland Area.
The financial oversight bill and the amendment to the reconstruction fund statute were the focus of most of the struggle between the ruling and opposition parties during deliberations. The most vociferous debate had involved the investigative powers and personnel make-up of the proposed financial oversight committee. While earlier debate over the issue had spanned two legislative sessions and come to naught, legislators were finally able to move the bill forward in the special session.
The new law establishes a unified mechanism for overseeing the banking, securities, futures and insurance industries. Under the law, a number of regulatory agencies-including the Bureau of Monetary Affairs, the Department of Insurance and the Securities and Futures Commission under the Ministry of Finance, as well as the Central Bank of China's Bank Examination Department and the Central Deposit Insurance Corporation's Bank Examination Department-will be merged into the Financial Oversight Committee, which will have "investigative powers" rather than the "quasi-judicial powers" that the Executive Yuan had originally sought.
The committee, which is slated to begin work on 1 July 2004, will have budgetary and staffing independence. It's nine members, meanwhile, will be nominated by the premier and confirmed by the president to terms of four years. The appointments themselves will be staggered, and, to avoid political meddling, no more than one-third of these appointments may be from a single political party.
Two years ago, the legislature passed the Financial Holdings Company Law, but was unable to pass the necessary oversight law due to a lack of consensus among the government bodies that oversee the banking and financial industries. The government was then derided for having allowed the formation of 14 huge financial holding companies over which it had no legal oversight. Once the Financial Oversight Committee law takes effect, Taiwan will be able to continue liberalizing the financial marketplace, while at the same time limiting the potential for negative consequences for the financial system by reining in the high-risk activities of financial institutions operating in a highly competitive environment.
Meanwhile, the Agricultural Finance Law also passed by the legislature in the special session is expected to resolve, at least for the time being, the financial troubles of the farmers and fishermen's associations, which last year caused more than 100,000 farmers to take to the streets and led to a Cabinet reshuffle. The new law confirms the Council of Agriculture as the competent authority for agricultural finance, and establishes an NT$20 billion National Agricultural Bank to provide financing for major agricultural construction projects. In addition, the law also provides for the establishment of a graded management system for the credit departments of Taiwan's farmers and fishermen's associations and also provides that these departments will no longer be limited to doing business only with association members.
The law limits the founders of the National Agricultural Bank to the government and the farmers and fishermen's associations. Initially, the government will provide 49% of the bank's capital, but this figure will fall to less than 20% in three years. To guard against further excessive lending by the credit cooperatives, the law also requires the establishment of a "credit committee" and the institution of internal control and audit mechanisms.
The most contentious portion of the law concerns how to dispose of the 36 credit departments whose operations the government ordered taken over. In principle, the law allows the farmers and fishermen's associations of which the departments were originally a part to buy them back. However, the asset assessment standards and disposal criteria are not due to be set by the Ministry of Finance and the Council of Agriculture until sometime within six months of the law's finalization.
Most people feel that the passage of the Agricultural Finance Law will ease the tension at Taiwan's credit cooperatives, and help the farmers and fishermen's associations put themselves on a more solid financial footing. Criticisms involve the provision allowing the associations to buy back the credit divisions the government ordered taken over, which is seen as derailing what had been a good start to financial reform.
The Real-Estate Securitization Statute, meanwhile, which is linked to the vitality of the real-estate market and for which builders have been pushing for 16 years, recognizes two types of securitization-that performed by real-estate investment trusts and that performed by real-estate asset trusts. The former operate like a mutual fund, selling shares to raise capital that is invested in a real-estate portfolio. Under the latter, a fiduciary issues shares on behalf of the property holder, who retains title to the property.
Simply put, securitization means breaking one or several large, relatively illiquid pieces of real-estate into smaller units, then selling shares in these units to investors. The point of contention in the law had to do with whether land development projects were appropriate targets for securitization. The opposition parties wondered whether securitization of "developmental" real-estate would transfer risk from developers to ordinary investors, and be seen as a way of bailing out the developers who had acquired land along the high-speed rail line and along the CKS Airport-Taipei rail connector line. Following negotiations between the ruling and opposition parties, legislators cut the portions of the law covering "developmental" real-estate and added a supplementary resolution stating that when the market had developed sufficiently to warrant it, the Ministry of Finance would study the possibility of adding such a provision to the law.
The construction industry, which was supportive of the securitization law, believes that the law will enlarge the real-estate market and make it more liquid. However, the industry also felt that the law had been marred by the exclusion of "developmental" real-estate, arguing that if developers had the money to develop land and complete construction on their own, they wouldn't need the securitization law to raise capital.
Turnover in the real-estate market could soon be on the rise. Under the new law, commercial properties such as office buildings, department stores, hotels and exhibition halls could easily be securitized, making them more liquid assets. This would, in turn, improve the finances of Taiwan's banks by allowing them to more easily dispose of the properties they have acquired from developers who have defaulted on their loans.
However, commentators have noted that if this policy is to be successful, other supporting structures must be put into place. Taiwan needs, for example, independent professionals to appraise, manage and stabilize the earnings from these properties. And if the government wants the industry to be well run and if it hopes to persuade institutional investors to invest in these new securities, it must allow real-estate trusts to list on the stock market.
Of all the Executive Yuan's six legislative proposals, the ruling and opposition parties were most strongly in agreement about the Statute Governing the Establishment and Management of Free Ports. The statute provides a number of mechanisms intended to help Taiwan achieve its goal of becoming a regional operations center. These include one-stop administrative processing and the elimination of duties on goods and equipment within the free ports, as well as measures to improve logistics, spur investment, make it easier for foreign businesspeople to enter Taiwan and allow the processing of unfinished mainland goods in Taiwan.
The new law also establishes the right of the free ports to employ foreign labor, but, to minimize the impact on the local labor market, requires that salaries be set according to the Labor Standards Law and meet the minimum wage. The law further states that at least 5% of the workforce of free-port enterprises must be Aborigines. (These provisions, late additions to the bill, are being heavily criticized by the business community.) According to the Council for Economic Planning and Development, the free ports will add NT$120 billion to exports and NT$88 billion to imports annually, while also creating 170,000 new jobs.
As expected, the political implications of the Statute Governing the Relations Between the People of the Taiwan Area and the Mainland Area prevented its passage. But perhaps the most pressing issue before the legislature was amending the Financial Reconstruction Statute, which was seen as an index of the progress of financial reforms. Everyone is well aware that the Financial Reconstruction Fund has insufficient funds to finish its cleanup of problem financial institutions. Moreover, Chung Shing Bank and the Kaohsiung Business Bank are losing more than NT$200 million per month, a shortfall which the national treasury must continue to cover. Unfortunately, much to the disappointment of the government and the public, the amendments stalled when negotiations on the issue of compensation for non-depository liabilities failed to reach a conclusion.
Generally speaking, the public believes that the four bills that were passed will help improve the economic climate, strengthen the legal underpinnings of Taiwan's financial system, and create more business opportunities for the public. On the other hand, in devoting so much attention to getting the economy back on track, the government has failed to develop a comprehensive plan for dealing with the impact of these reforms on its own finances. For example, promulgating the new laws, especially those that involve the financial system, will cost money. And the reforms are also likely to reduce government revenues. This lack of a comprehensive evaluation of the economic and financial impact of the reforms could become troublesome when the laws are actually implemented.
