Taiwan's fund outflows

Unlike traditional investment methods, non-SIT offshore funds allow various channels of investment, including private equity funds and other alternative investments allowing deposit-taking corporations to provide their clients with numerous investment plan options to arrange and allocate their assets.

Whilst the stock and relevant bond markets have continued to be volatile due to the ongoing dual impact of inflation and interest rate hikes, alternative ways of investment are less affected by the fluctuations in publicly traded market assets such as stocks and bonds, thereby achieving portfolio diversification that reduces investment risk. With diverse strategies, alternative investments can hedge against inflation while pursuing investment returns. Even with rising interest rates, alternative investments can maintain a robust performance in helping clients to maximise returns.

These non-SIT offshore funds have required Taiwanese deposit-taking corporations to establish collaborative relationships with a number of world-renowned asset management companies, thus increasing the regulatory complexity of Taiwan’s financial market. With the global tightening of money supply and slowing economic growth, it is crucial to construct investment portfolios for high-asset clients that can reduce risk in traditional equities and bonds.

The Taiwan Stock Exchange
Foreign investors seem to be undeterred by the possibility that growing tensions between Taiwan and China could precipitate fund outflows from the Taiwan market, according to a recent statement by the chairman of the Taiwan Stock Exchange.

Up until the end of June this year, foreign investors were investing heavily in Taiwan stocks with net foreign buying over the previous six months totalling US$12 billion, a high-water mark not reached since the first half of 2008. Taiwan's benchmark index performance was up 16% in US dollar terms this year, among the best benchmark performances in Asia.

But the net buying rally quickly changed course in the third quarter of 2023, shifting to a net selling of US$2.62 billion for July, US$3.2 billion in August and NT$168.03 billion (around US$5.25 billion) in September. The FSC has since announced that foreign institutional investors registered an aggregate net sell of more than NT$77 billion or US$2.39 billion worth of shares on Taiwan's stock market in the first nine months of this year. However, the FSC said foreign institutional investors still recorded a net fund inflow worth US$10.56 billion into Taiwan in the first three quarters of the year despite a net fund outflow of US$3.28 billion in September.

The Taiwan Stock Exchange sees this as a natural plateau after a rally rather than a sign that foreign funds are fleeing the market.

Research for this article also revealed that for foreign investors, including from countries such as Japan and Singapore, cross-strait tensions barely register as a concern.

MOEAIC approved inflows
In terms of inbound investment, during the five-month period of this year, MOEAIC approved 938 foreign direct investment (FDI) projects valued at US$4.27 billion, down 0.51% from a year earlier, with companies from Germany being the largest investors, pledging to invest US$958 million, ahead of the United States (US$577 million). Europeans are the largest investors in Taiwan with cumulative investments of US$70.59 billion (as of August 2023), followed by the United States (US$26.6 billion) and Japan (US$26.4 billion).

The New Southbound Policy inflows
MOEAIC approved investments from the 18 countries under the government's "New Southbound" policy totalled US$481 million during the January-May period, up 59.35% from a year earlier as Singapore, Malaysia and Thailand served as the top three investors.

China inflows
Since Taiwan lifted a ban on Chinese investments in June 2009, the government has approved about US$2.58 billion in funds from China, according to MOEAIC.

The MOEAIC said it approved a total of US$12.75 million worth of investments pledged by companies in China during the same five-month period of this year, up 45.62% from a year earlier and the increase largely came after Arizon RFID Technology (Hong Kong) Co. announced plans to invest NT$275 million (US$8.9 million) in its branch in Taiwan.

Domestic investment by the Taiwanese government and private investors
To provide a complete picture, having discussed outflows and inflows, we should also review domestic investments by both the government and private investors.

A key indicator is what is known as Gross fixed capital formation (GFCF). GFCF is a component of the expenditure on gross domestic product (GDP) that indicates how much of the new “value added” in an economy is invested rather than consumed. It measures the value of acquisitions of new or existing fixed assets by the business sector, the government and households minus the disposal of any fixed assets. 

Taiwan’s GFCF data is updated quarterly, starting with US$21.2 billion in the fourth quarter of 1983 all the way through to the second quarter of 2023. The data reached an all-time high of US$54 billion in the third quarter of 2021 and a record low of US$3 billion in the first quarter of 1984.

Taiwan’s GFCF in the second quarter of this year was US$48 billion, but this was actually a decrease from the number for first quarter which was US$50 billion.

What are these figures telling us, other than the fact that Taiwan’s domestic economy may, like many other countries, be softening and that the outflows still represent a significant amount of money leaving Taiwan and not being invested locally?

Taiwan is critically important market for regional and global trade and investment and is one of the world’s top 20 economies in terms of GDP. Taiwan is an export-dependent economy with a highly skilled workforce, and it is at the center of global and regional high-technology supply chains due to its manufacturing industries of semiconductors, 5G telecommunications, AI, and the Internet of Things (IoT).

All of that is great at this point in time. But Taiwan must continue to move forward. In many other countries it would be the government and domestic investors leading the charge, not only in terms of investment but also direct participation in the development of the nation whilst still allowing foreign investment.  However, other than the activities of companies such as TSMC, it is sometimes difficult to see direct evidence of substantial domestic private investment.

But credit (no pun intended) should be given to a few of the larger Taiwanese banks, such as Cathay United, Taipei Fubon and CTBC, that are helping to financially support infrastructure projects, particularly in the renewable energy sector. More is needed and it is not encouraging to speak with domestic bankers who say their lack of participation is due to an inability to assess and therefore price the risk of such major infrastructure projects or do they simply not have the appetite?

Arguably, the government is trying to do its part, with programmes such as the Forward-looking Infrastructure Development Program. This programme aims to build infrastructure for national development in the next 30 years in areas such as railways, water environments, green energy, smart city projects and urban and rural projects to balance regional development.

However, it seems that to achieve these goals Taiwan still needs to turn to foreign investors as its finance, electronics, and wholesale and retail sectors remain top targets of inward FDI.

But there are also signs of some stagnation in this inward FDI and in some cases a reluctance by foreign investors to continue or extend their activities in Taiwan. Some have even chosen to leave the market and invest elsewhere. There are real structural impediments in Taiwan’s investment environment, such as excessive or inconsistent regulation, market influence exerted by domestic and state-owned enterprises (SOEs) in the utilities, energy, postal, transportation, financial, and real estate sectors and foreign ownership limits in sectors deemed sensitive.

It does not help the domestic cause when Taiwan has one the lowest levels of private equity investment in Asia, although private equity firms are increasingly pursuing opportunities in the Taiwan market. But even foreign private equity firms have expressed concern over the lack of transparency and predictability in the investment approvals, as well as exit processes and various regulators’ reliance on administrative discretion when rejecting certain transactions. Major industry and business groups have also called on Taiwan authorities to re-examine Taiwan’s energy generation mix and high local content requirements, which complicate foreign firms’ competition with domestic suppliers and have driven up overall costs for foreign offshore wind developers, putting Taiwan’s future energy security needs at risk.

Clearly, Taiwan needs more domestic investment. It cannot all come from a handful of the major banks and some domestic private equity investments. If that increased domestic investment comes at some expense to the levels of quarter after quarter of net fund outflows, then so be it. A solution must be found.

Conclusion
It is never an easy task to balance the government’s goals for growth and financial stability and investors’ demands for investment returns. Balancing any economy is not a job for the faint hearted. Taiwan must step up its domestic investment levels. Given the continued prospects of a global recession, despite a war chest in terms of its balance of payments, Taiwan must be careful to avoid the risk of overreliance on companies like TSMC. At present, the central bank, MOEA and FSC seem to be providing a steady course but there are challenges in the present and there will always be challenges in the future. Let’s see if we get to 53 quarters of net fund outflows.

Paul Shelton is a consultant with 30 years of experience in the international financial services and related industries with skills in all aspects of legal and financial crime compliance and regulatory relationship advisory and management.