A Six-Year High

Economic News

22 Jul 2010
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Taiwanese shares had risen to their highest level in six years by the time the market closed on December 4. The main impetus for the rise were expectations of friendlier ties with Mainland China after the 2008 elections and a perceived undervalued market, highlighted by an approach to take a well known technology firm private.



The local benchmark closed at 7647.01 points, rising 0.4% in the days trading. After the weekend's mixed elections results the index dropped to 7458.56.



The bid for Advanced Semiconductor Engineering (ASE), which was confirmed to the stock exchange on November 24, by private equity fund the Carlyle Group, has concentrated investors' attention on the relatively cheap fundamentals of the Taiwanese market compared to other Asian markets such as Hong Kong. There is some speculation that eventually the company will be floated in Hong Kong where it could expect to show a higher valuation.



Uni-President Enterprise Corporation, part of a food and beverage conglomerate, went up 3.4% on December 4. It recently said that it planned to list one of its China based subsidiaries in an, as yet unspecified, Asian market.



At present, the Taiwanese government imposes restrictions on the amount a company can invest in China. There is a cap on how much of a company's net worth can be invested in China, which is 20, 30 or 40%, depending on the size of the company. There are calls for this to be relaxed to allow Taiwanese companies to expand in China at their own rate, making them less attractive acquisition targets for foreign firms. Some reports have indicated that this cap was an important factor in the bid for ASE.



The ruling Democratic Progressive Party (DPP) has so far refused to reduce this cap and some commentators have said this is positive as it encourages Taiwanese firms to look to other markets. It also points out that cumulatively, currently only a total of 10% of all Taiwanese companies' net worth is invested in China. A government spokesmen, quoted in local media, explained ASE's investment in China equals around 10% its net worth, well below its limit.



Premier Su Tseng-chang was quoted in the local media as telling the cabinet that 70% of outward investment is directed to China. He believes that there is too much investment in this market. The "Taiwan Thinktank" echoed this point when it was reported as saying, on December 11, that Taiwanese businesses should look to the whole world and not only to China to invest in.



Su also said that the government was willing to make it easier for Chinese tourists and business travellers to visit Taiwan, which would please the traders. According to reports, Hu Sheng-cheng, the chairman of Taiwan's council for economic planning and development, said that allowing Chinese tourists into Taiwan would add 0.15 of a percentage point to the rate of economic growth. His estimate is based on the experience of Hong Kong and Singapore.



The weekend's mayoral elections were mixed as the ruling DPP managed to keep control of the Kaohsiung. Many analysts had expected the opposition KMT to win and traders had hoped this would be a good indication of a KMT victory in the 2008 presidential elections. Traders feel that a KMT government would significantly improve cross strait relations and improve Taiwanese businesses' ability to trade with China.



Construction companies and companies with property assets helped the market reach its six-year high. It is thought that profits from the expansion of Taiwanese firms into China could eventually encourage investment in the local economy and property market.



Some investors are still put off Taiwan by corporate governance issues. Large family holdings are particularly unattractive. However corporate governance can be seen to be improving as, for example, there are more independent directors on boards. It is also hoped that increasing foreign ownership and management might help to improve investor relations and corporate culture.



This, combined with the increased comparison of its fundamental valuations that the Carlyle bid has brought into focus, has encouraged investment in the market.

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