Finance and Banking

Taiwan's booming credit card market has become even more dynamic in recent years, with the top issuer being China Trust Commercial Bank.

Taiwan’s financial situation in 2001 was a turning point. The domestic economy experienced its first recession ever since the central government’s move to Taiwan in 1949 due to deteriorating external factors and worsening problems in the domestic financial structure. A sluggish global economy, and weak demand in the IT sector led to substantial declines in foreign trade as both domestic demand and production suffered. At the same time, the domestic economy’s financial sector also deteriorated due to worsening non-performing loan problems caused by declining stock market performance and rising unemployment.

Real GDP growth increased at a less-than-expected rate of 0.61 percent in the first quarter of 2001. Nevertheless, the Taiwan Stock Exchange (TSE) Capitalization Weighted Stock Index (TAIEX) 臺灣證券交易所發行量加權股價指數 rebounded strongly to a year high of 6,104 points in February. The financial situation took a dive after the second quarter, however, as real GDP growth recessed to -3.26 percent and the New Taiwan dollar depreciated, dropping to 34.465 to one US dollar by June. The situation deteriorated even further following the September 11 terrorist attacks in the US, registering a third quarter GDP growth of -4.42 percent for Taiwan─its largest decline in a quarter-century. Disasters from typhoons also intensified market pessimism, and the TAIEX soon dropped to a year low of 3,446 in October. In the fourth quarter, the index rebounded due to an improving US stock market performance, a more optimistic domestic economic outlook, and increased investor confidence after the ruling party’s win in the Legislative Yuan election in December. In summary, real GDP growth recorded -2.18 percent and the TAIEX increased by 17.1 percent in 2001.

The government held the Economic Development Advisory Conference 經濟發展諮詢委員會議 in August 2001 to establish a consensus for setting a new course and direction for development, thereby boosting economic confidence. The government continued to implement financial reforms, with an extraordinary session of the Legislature in June 2001 to review six financial reform bills, including the Statute for the Establishment and Administration of the Financial Restructuring Fund 金融重建基金設置及管理條例, the Financial Holding Company Law 金融控股公司法, and the Law Governing Bills Finance Businesses 票券金融管理法草案.

In 2001, the fiscal year (FY) for the government’s budget began to be matched to the calendar year, starting in January and ending in December. In this chapter, an average NT$/US$ exchange rate of 31.225 is used for 2000, 33.800 for 2001, and 34.575 for 2002.

Government Expenditures

In FY2001, government expenditures declined 31.3 percent from the FY2000 level of NT$3.141 trillion to NT$2.159 trillion, mainly due to the extension of FY2000 from 12 months to 18 months (from July 1, 1999 to December 31, 2000) in order to synchronize the fiscal and calendar years in 2001. A breakdown of FY2001 government expenditures showed that education, science, and culture accounted for 20.0 percent of total expenditures, social welfare for 17.6 percent, general administration for 15.5 percent, economic development for 13.6 percent, national defense for 11.3 percent, pension and survivors?benefits for 9.2 percent, interest payments for 8.5 percent, community development and environmental protection for 2.6 percent, and miscellaneous expendituresfor 1.6 percent. Overall, current expenditures accounted for 84.1 percent of net expenditures at all levels of government, while capital expenditures accounted for 16.2 percent.

With the exception of spending for miscellaneous expenditures, expenditures in all other areas fell in FY2001. Community development and environmental protection expenditures registered the greatest decline, dropping by 46.5 percent, followed by economic development by 38.3 percent; education, science, and culture by 34.0 percent; interest payments by 32.3 percent; national defense by 31.5 percent; social welfare by 28.6 percent; general administration by 28.3 percent; and pension and survivors?benefits by 25.0 percent. Despite the decline, these figures still reflected the government’s priorities with regard to education, science, culture, social welfare, and general administration. Overall, current expenditures at all levels of government decreased by 28.4 percent to reach NT$1.81 trillion, while capital expenditures declined 43.0 percent to NT$348.70 billion. In comparison, the share of current expenditures to total expenditures increased from 80.5 percent in FY2000 to 83.8 percent in FY2001, while the share of capital expenditures declined from 19.5 percent to 16.2 percent.

Government Revenues

Government revenues also declined in FY2001. With decreases in revenues from taxes, monopolies, public enterprises, utilities, properties, fees, fines, and indemnities, the total revenue for all levels of governments decreased 31.3 percent in FY2001 to NT$1.913 trillion. It is worth noting that there were no revenues from monopolies that year due to Taiwan’s WTO commitment to abolish its tobacco and alcohol monopolies. Overall, from FY2000 to FY2001, the share of current revenues declined from 96.2 percent to 95.2 percent, and the share of capital expenditures increased from 3.8 percent to 4.8 percent. These figures indicate that the government was relying more on capital accounts and less on current accounts in FY2001.

Financial Institutions

Financial institutions involved in indirect financing and money market activities included commercial banks, trust and investment companies, credit cooperatives, credit departments of farmers’ and fishermen’s associations, the Postal Remittances and Savings Bank 郵政儲金匯業局, bills finance companies, financial holding companies, and local branches of foreign banks. There were 416 depository institutions, including deposit money banks and the Postal Savings System, in Taiwan at the end of 2001, a decrease of 39 institutions compared with the previous year-end. Of these 39 institutions, 36 community financial institutions─ consisting of 7 credit cooperative associations and 29 credit departments of farmers’ and fishermen’s associations─were taken over by 10 domestic banks in September 2001. Two credit cooperative associations were merged with two domestic banks, two local asset management companies and four financial holding companies were set up, and the total number of foreign banks decreased by one. At the end of 2001, Taiwan was home to 53 commercial banks with 3,005 branch offices. These banks accounted for 71.33 percent of total deposits accepted and 89.38 percent of total loans extended. Commercial banks are relatively large in terms of their net worth and assets. According to the July 2001 issue of The Banker, Taiwan had 26 banks ranked among the world’s top 500 in terms of tier one capital.

Foreign Exchange Market

At the beginning of 2001, the NT$/US$ exchange rate was 32.943. Due to a surge in foreign capital inflows and the shifting of funds in local banks from foreign currency deposits to NT dollar deposits, the NT dollar appreciated, reaching its highest level for the year of 32.271 on February 20. In March, the NT dollar turned weak because of a softening Japanese yen, and remained stable below the 33.0 mark throughout April and most of May. However, market rumors, the release of unfavorable economic indicators, and the continuous downward trend of the Japanese yen depressed the NT dollar, causing it to depreciate to 35.050 by July 11. With the September 11 terrorist attacks in the US weakening the US dollar, the NT$/US$ exchange rate began to appreciate. Meanwhile, to reduce the cost of foreign currency funds for local banks, the Central Bank of China (CBC) lowered the required reserve ratio on foreign currency deposits from 10 percent to 5 percent on October 4, and further cut the ratio to 2.5 percent on November 8. The continuous inflow of foreign funds into equities and the shifting of funds from foreign currency deposits to NT dollar deposits, both of which were buoyed by a rebound in the local stock market in November, helped the NT dollar to rise against the US dollar. In the latter part of December, however, following another sharp decline in the Japanese yen, the NT dollar depreciated again, falling to 35.127 on December 27, near its 15-year low. At the end of 2001, the NT dollar appreciated slightly to finish the year at 34.999.

Compared with its NT$/US$ exchange rate of 32.992 at the end of 2000, the NT dollar depreciated by 5.73 percent in 2001. The average exchange rate for 2001 was 33.8, representing a depreciation of 7.62 percent in comparison with 31.225 in 2000. With respect to other major currencies, the NT dollar appreciated by 8.02 percent against the Japanese yen and depreciated by 0.30 percent against the euro between the end of 2000 and the end of 2001.

In 2001, the total net trading volume in the foreign exchange market had shrunk by 3.7 percent to reach US$1.16 trillion. The average daily turnover stood at US$4.71 billion. With respect to types of transactions, spot transactions accounted for 65.4 percent of total turnover. Regardless of the minor portion (0.7 percent) of cross-currency swaps, it grew by 138.3 percent in 2001. The rapid growth was attributable to the increased issuing of NT dollar-denominated bonds in Taiwan by international financial institutions, as well as a relaxation of the limit on overseas investments by domestic life insurance companies in mid-2001. By the end of 2001, other forex products were being traded on the local market, such as foreign currency interest rate-related products, commodity options, stock index options, commodity price swaps, and trust funds for foreign securities investments. The turnover for these new products posted an increase of US$32.67 billion, or 62.3 percent, over the previous year to reach US$ 85.14 billion in 2001. Of this amount, trust funds for foreign securities investments accounted for the largest share with US$58.82 billion, followed by foreign currency forward rate agreements at US$12.17 billion.

Transactions in the foreign currency call-loan market increased slightly in 2001, mainly due to an increase in demand by some banks for foreign currency funds for short-term operating purposes. Total transactions in the foreign currency call-loan market for 2001 amounted to US$859.2 billion, an increase of US$6.2 billion, or 7.8 percent, over 2000. Of this total, US dollar transactions amounted to US$857.0 billion, Japanese yen transactions totaled ￥195.0 billion, and euro transactions totaled 676 million euros.

At the end of 2001, Taiwan had 68 offshore banking units (OBUs) in operation with combined assets totaling US$50.91 billion─an increase of US$3.57 billion, or 7.5 percent, over 2000. Domestic banks operated 38 of these OBUs and accounted for US$37.00 billion, or 73 percent, of total assets, while foreign banks ran the remaining 30 OBUs and accounted for US$13.91 billion, or 27 percent. The forex-trading turnover of all OBUs in 2001 was US$32.71 billion, of which US$24.08 billion was for spot transactions, US$7.49 billion for currency swap transactions, and US$1.14 billion for forward transactions. The total trading turnover of other new derivative products, such as margin trading; foreign currency interest rate swaps and forward rate agreements; options; financial futures; and cross currency and commodity price swaps, amounted to US$16.7 billion.

As trade surplus expanded and foreign portfolio investments grew, the CBC’s foreign exchange reserves continued to accumulate, rising from US$106.7 billion at the end of 2000 to US$122.2 billion at the end of 2001.

Stock Market

The TAIEX closed at 5,551.2 points at the end of 2001, an increase of 17.1 percent from the end of 2000. Average daily turnover for 2001 was NT$75.2 billion, a 33 percent drop from the figure recorded in 2000, while the Over-the-Counter (OTC) weighted average stock price index advanced by 29.8 percent. The average daily turnover in 2001 decreased to NT$9.5 billion, a sharp decline of 42 percent compared to 2000.

The TAIEX rallied at the beginning of 2001 following a rebound in the US equity market and various domestic factors, which pushed the index upward to its high for the year of 6,104 points on February 15. However, the TAIEX soon reversed its upward trend after listed companies began releasing disappointing earnings reports and major local electronics manufacturers began revising their financial forecasts downwards. The September 11 terrorist attacks in the US and heavy losses across the country caused by Typhoon Nari a week later forced the TAIEX down even further, eventually falling to its low for the year of 3,446 points on October 3. The TAIEX later reclaimed much of its losses as a result of smooth progress in the anti-terrorist war in Afghanistan, booming US high-tech stock prices, massive buying by foreign investors in the local market, and the ruling party’s win in the December Legislative Yuan elections, ending the year at 5,551.2 points. Among all industrial sub-indexes, electrical and electronic machinery stocks and banking and insurance stocks, which added 32.7 percent and 6.7 percent, respectively, outperformed all other stocks for the year. Stocks from other traditional sectors registered declines, with the cement and ceramics, steel and iron, and food sectors registering declines of 29.7 percent, 28.1 percent, and 22.4 percent, respectively. Overall turnover also dropped significantly in 2001, with the average daily turnover for the year a mere NT$75.2 billion; a huge drop compared to the 2000 figure of NT$112.6 billion. Thin trading volumes also resulted in a decline in the turnover rate from 195 percent in 2000 to 160 percent in 2001. A total of 584 companies were listed on the market at the end of 2001, representing an increase of 53 companies over 2000, and market capitalization amounted to NT$10.2 trillion, a 25 percent increase compared with the end of 2000.

The OTC weighted average stock price index experienced large fluctuations throughout the year, but eventually closed at 136.2 points in 2001, a 29.8 percent advance over 2000. The index started the year with a rally and reached its high for the year of 152.5 points on March 29; however, beginning in April, the index slipped amid concerns over domestic economic prospects, and the September 11 incidents forced the index down further to its low for the year of 78.2 points on October 8. A buying spree by foreign investors following the ruling party’s victory in the Legislative Yuan election at the end of 2001 allowed the index to recover some of its lost ground. Of the OTC’s various sectors, the securities sector had the best performance with a rise of 60.7 percent, followed by the electronics sector with a 42.3 percent increase over 2000. The banking, machinery, and chemical sectors all registered advances, while the steel and iron, textiles, and construction sectors posted declines, with the latter posting the largest drop of 50.2 percent for the year. Overall, average daily turnover declined sharply by 42 percent, dropping from NT$16.5 billion in 2000 to NT$9.5 billion in 2001, mainly due to the shrinking trading volume caused by plummeting stock prices from April to October. By the end of 2001, the number of listed companies in the OTC market had increased to 333, and market capitalization had expanded by 34.4 percent to reach NT$1.412 trillion.