US embassy cable - 04TAIPEI4050

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 004050 
 
SIPDIS 
 
STATE PLEASE PASS AIT/W AND USTR 
STATE FOR EAP/RSP/TC, EAP/EP AND EB/IFD/OIA 
USTR FOR SCOTT KI 
USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER 
TREASURY FOR OASIA/ZELIKOW AND WISNER 
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF GOVERNORS, 
AND SAN FRANCISCO FRB/TERESA CURRAN 
 
E.O. 12958: DECL: 12/16/2024 
TAGS: PINR, EINV, EFIN, ECON, TW, CH, Cross Strait Economics 
SUBJECT: TAIWAN'S NEW FINANCIAL SUPERVISORY COMMISSION 
(C-AL4-00965) 
 
REF: A. STATE 267500 
 
     B. TAIPEI 2009 
 
Classified By: AIT DIRECTOR DOUGLAS PAAL, REASON: 1.4 (C) and (D) 
 
1.  (SBU) Summary:  Taiwan's Financial Supervisory Commission 
has been very active since it was established in July 2004 to 
encourage market liberalization and reform.  Although some 
foreign businesses have complained about difficulty in 
keeping up with the flurry of new regulations, the 
regulations are consistent with efforts to liberalize the 
financial sector.  The FSC emphasizes its status as an 
independent agency, but has close ties to the ruling party. 
End summary. 
 
FSC Objectives 
------------------- 
 
2.  (C) The stated FSC objectives are internationalization 
and deregulation of Taiwan financial sector, flexible 
regulations and strong enforcement, and maintaining Taiwan's 
financial stability.  Long range FSC goals include passage of 
new legislation including the Single Financial Services Act 
and the Securities and Exchange Act (both awaiting 
legislative action).  FSC Chairman Kong Jaw-sheng said the 
FSC fully supports President Chen's stated goal of reducing 
the number of financial holding companies in Taiwan from 14 
to seven within the coming two years.  FSC International 
Affairs Department Deputy Director General Andrea Lee told 
AIT that the FSC was disappointed that the recent auction of 
the Chung Hsing Bank had not attracted foreign bidders.  It 
remains a goal of the FSC to encourage foreign acquisition of 
Taiwan banks. 
 
Relations With Other Agencies 
------------------------------------- 
 
3.  (C) There was confusion in some press reports regarding 
the relationship of the FSC and the Ministry of Finance (MOF) 
as well as the FSC responsibility for financial policy 
making.  Some reports indicated that this responsibility 
shifted from the MOF to the FSC and back to the MOF.  The FSC 
was established in July 2004 as an independent regulatory 
agency outside of day-to-day direct executive branch control. 
 The FSC chairman and its nine commissioners are nominated by 
the Premier and appointed by the President for a fixed term 
of office.  While political affiliation is obviously a factor 
in their selection, they are prohibited from participating in 
political activities while in office.  The executive branch 
is still able to promote its financial policies through the 
MOF, which it controls directly.  AIT has explored this 
issued in some detail with both the Minister of Finance and 
the Chairman of the FSC and found them to be largely in 
agreement on this point. 
 
Political Connections 
------------------------- 
 
4.  (C) While FSC Chairman Kong Jaw-sheng likes to emphasize 
FSC independence, he had been personally closely associated 
with President Chen and the DPP government prior to his 
appointment as FSC Chairman.  He helped organize a Taiwan 
investment team to Europe in 2002 on behalf of the DPP 
government while he was Taiwan country head of the Credit 
Swiss First Boston (CSFB) and claims that subsequent pressure 
from China on CSFB led to his separation from the bank.  FSC 
Vice Chairman Lu Tung-ying and FSC Commissioner Lin Kun-pao 
both campaigned for President Chen prior to his March 2004 
re-election (also prior to the establishment of the FSC). 
However, Kong, Lu, and Lin are not DPP party members, but 
have solid financial backgrounds.  None of nine FSC 
commissioners is a member of any political party.  The FSC 
has not been a significant target of opposition party 
criticism.  The most politically sensitive issue it deals 
with is the Financial Reconstruction Fund (FRF) that 
facilitates the sale of troubled financial institutions.  The 
FSC has sought additional funding for the FRF, but it has 
been blocked by the opposition parties. 
 
FSC Chairs the Joint Standing Committee 
--------------------------------------------- ----- 
 
5.  (SBU) The FSC functions as a consolidated financial 
regulator over the banking, insurance, securities and futures 
industries.  Its nine commissioners represent the four 
bureaus (banking, insurance, securities and futures, and 
inspection) and five supporting departments (planning, 
international affairs, legal affairs, information management, 
and support) within the FSC.  Decisions are made by a 
majority vote of commissioners.  Taiwan officials believed a 
consolidated regulator was needed to respond to the challenge 
of regulating multi-faceted financial holding companies and 
the global trend of increasing cross-sector business among 
banking, insurance, and securities and futures.  The FSC 
enjoys quasi-judicial powers in that it can supervise, 
examine, conduct investigations, and impose fines or other 
penalties.  The FSC chairs the Joint Standing Committee 
(JSC), which also includes representatives of the MOF, 
Central Bank, Mainland Affairs Council (MAC), Council for 
Economic Planning and Development, and other ministries on an 
ad hoc basis. 
 
6.  (C) In remarks to an Amcham meeting on December 15 
Chairman Kong noted that the JSC meets to discuss financial 
and monetary policies that may go beyond the responsibility 
of any single agency.  Kong mentioned privatization of 
state-owned enterprises (SOEs) as an example.  Financial 
sector SOEs with government ownership above 50 percent come 
under the jurisdiction of the MOF.  However, the FSC can 
assist the privatization of those with less than 50 percent 
government ownership.  In both cases, the FSC is involved in 
arranging underwriting for the issuance of equity shares. 
Kong also mentioned that while the FSC has overall 
responsibility for securities trading, the Central Bank has 
authority over capital flows arising from trading in foreign 
securities and foreign portfolio investor trading in Taiwan. 
 
Cross-Strait FSC Issues 
---------------------------- 
 
7.  (C) Currency exchange between China's Renminbi (RMB) and 
Taiwan's New Taiwan Dollar (NTD) is another issue requiring 
interagency coordination between the FSC, Central Bank, and 
MAC.  The FSC oversees banking operations, while the Central 
Bank is responsible for managing capital flows with foreign 
currencies, and MAC has authority over cross-Strait issues. 
A Central Bank official told AIT that in early August an 
interagency meeting attended by Taiwan National Security 
Council Secretary General Chiou I-jen, the Central Bank, FSC, 
and MAC discussed a pilot project for legal exchange between 
the NTD and RMB by banks on the Taiwan-controlled islands of 
Kinmen and Matsu.  However, according to our Central Bank 
contact, the proposal has been blocked by the MAC and is 
still sitting on the desk of the MAC Vice Chairman awaiting 
his approval.  During an early December trip to Kinmen, AIT 
found that banks there were still unable to change currency 
between RMB and NTD. 
 
Taiwan's Strengths 
----------------------- 
 
8.  (C) The FSC believes that Taiwan has potential as a 
regional fund raising and asset management center.  Chairman 
Kong noted that companies from Singapore and Hong Kong 
frequently come to Taiwan to raise capital.  He pointed out 
that Taiwan has a strong and globalized manufacturing base, 
huge capital surplus and low external debts, well-trained 
professionals, and a well-established financial system.  He 
also noted that the liquidity of Taiwan's stock market is 
third largest in the world, its market capitalization is 
first among emerging markets and third overall in Asia, and 
the volume of Taiwan's bond market is also third in Asia. 
 
New FSC Regulations 
--------------------------- 
 
9.  (C) Among new regulations, the FSC has abolished required 
earnings forecasts for listed companies.  The reason behind 
this move was to prevent abuse and stock price manipulation 
and to encourage portfolio investors to read and analyze 
company financial statements rather than depending only on 
earnings forecasts.  Just as Taiwan has too many banks, it 
also has too many insurance companies.  The FSC is 
encouraging them to merge into bigger, stronger insurance 
companies that can play a more significant role in the 
region.  The FSC is currently rating insurance companies on 
the quality of their management and financial standing and 
will publish the names of companies receiving penalties.  The 
FSC has restricted the use of credit cards for paying debt in 
order to get credit cards back on track as tools for 
consumption instead of debt repayment. 
 
Business Community Reaction 
------------------------------------- 
 
10.  (C) AIT has heard complaints from foreign financial 
firms about the difficulty of keeping up with the many new 
requirements imposed by the FSC.  Business people say they 
were confused about who spoke for the FSC in the context of 
contradictory statements from different FSC commissioners. 
To address these problems, the FSC appointed a spokesperson 
and made efforts to increase the transparency of its 
decision-making procedures.  Chairman Kong has delivered 
powerpoint presentations and answered questions at a number 
of gatherings of foreign businesspeople, including Amcham and 
the European Chamber of Commerce in Taipei (ECCT).  During 
Chairman Kong's Amcham presentation, he answered wide-ranging 
questions for about 45 minutes. 
PAAL