1. Council for Economic Planning and Development Executive Yuan, R.O.C.( Taiwan ) July 15, 2006 TAIWAN’S FINANCIAL REFORMS AND ECONOMIC DEVELOPMENT TAIWAN’S FINANCIAL REFORMS AND ECONOMIC DEVELOPMENT The 14th Conference on Pacific Basin Finance, Economics and Accounting Sheng-Cheng Hu, Chairman

2. 2 CONTENTS I.Introduction II.Strategies for Developing Taiwan’s Economy III.Taiwan’s Financial Reforms IV.Concluding Remarks

3. 3 Source: Business Week, May 16, 2005. “The global economy couldn’t function without it.” I. Introduction

4. 4 Source: Business Week, May 16, 2005. Taiwan’s Tech Clout Where the island’s industries rank globally Taiwanese companies, from chip foundry TSMC to laptop maker Quanta, manufacture thousands of items essential to the global digital economy. Most appear under someone else’s name—and most are made in mainland China Number 1 Provider of chip foundry services, with 70% of the market worth $8.9 billion. notebook PCs, with 72% of the market worth $22 billion LCD monitors, with 68% of the market worth $14 billion PDAs, with 79% of the market worth $1.8 billion Number 2 Provider of servers, with 33% of the market worth $1.8 billion digital still cameras, with 34% of the market worth $2 billion

5. 5 Taiwan Economy vs Korean Economy TaiwanKorea 200320042005200320042005 Economic Growth Rate （ % ） 3.46.14.13.14.64.0 Per capita GDP in US$ 13,32714,27115,27112,65214,09816,306 Per capita GDP in US$ on PPP basis) 24,27926,24127,57218,18019,43020,590 Unemployment Rate+Inflation Rate （ % ） 4.76.06.45.26.46.8 Income Gap 6.16.0-7.27.4 WEF Growth Competitiveness 545182917

6. 6 SWOT Analysis of Taiwan’s Economy Weakness Threat Strength ‧ Rising market opportunities in the BRICs ‧ Rising demand for consumer electronics ‧ Rise of the BRICs and formation of regional trading blocs: Hollowing-out (?) and widening Income gap ‧ Rising energy prices. Opportunity ‧ Inadequate investment in R&D and infrastructure. ‧ Fragile financial system and chronic budget deficits. ‧ Weak legal environment and inefficient government operations ‧ Rigid labor markets ‧ Abundant High Quality Human Resources. ‧ Excellent entrepreneurial spirit and R&D Capabilities ‧ Solid manufacturing industry base ‧ SMEs highly flexible in responding to market changes.

7. 7 Conference on Sustainable Economic Development Objective: –Solve long-term structural economic problems to ensure sustainable development of economy –Per capita income in 2015: US$32000 Issues Addressed –Population Aging Issues: Social security and National Health Insurance –Industrial Competitiveness and labor-market issues –Financial markets and management of government assets and enterprises –Global-strategy and Cross-strait issues –Efficiency of the government sector

8. 8  Encouraging R&D clustering  Strengthening industrial clustering effect II. Strategies for Developing Taiwan’s Economy Take advantage of new business opportunities  Stepping up global positioning  Promoting the development of free ports Policy focus Measures Forge Competitiveness in Industrial sector  Ensuring adequate supply of industrial land  Providing assistance in fund raising and technology development  Strengthening the nurturing of science and technology manpower  Fiscal and financial reform  Stepping up science  Stepping up technology R&D Create innovalue Build up a sound environment for Investment

9. 9 Objective Improve the competitiveness of the financial services sector, and develop Taiwan as a regional financial service center Regional fund raising center Regional asset management center III. Taiwan’s Financial Reforms

10. 10 SWOT Analysis of Taiwan’s Financial Markets Weakness Threat Strength  New pension fund system helps develop asset management business  Vigorous capital market paves the way for developing Taiwan as a Regional Financial Services Center  Facing competition from international conglomerates  Need for strengthening and integration of regulatory environment in step with financial sector development. Opportunity  Relatively small scale of individual financial institutions  Limited liberalization of financial market  Too many state-owned banks  Lack of experience of cross-selling and internationalization  Synergy needs to be improved  Insufficient financial professionals  Transnational enterprises will need more financial services  Higher foreign exchange reserves, and less external debt  Abundant capital of overseas Taiwanese

11. 11 Strategies for Financial Reforms Clean up non-performing loans Develop sound investment climate through deregulation and financial liberalization Strengthen financial supervision Improve corporate governance by requiring greater transparency and corporate board independence. Privatization and private management of state- owned banks Promote financial consolidation and speed up M&A Building a competitive financial taxation environment in line with international practices. Strengthening risk management and promoting financial discipline and information transparency.

12. 12 ％ 2001 2002 2003 2004 2005 2006 banks’ Lending and Investment Growth Main Achievements 1. Decreasing Domestic Banks’ New NPL Ratio New NPLs Ratio ％ 12 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 12 3 5

13. 13 2. De-regulation  Facilitating Financial Market Consolidation 14 financial holding companies (FHCs) have been established since the end of 2001. Since September 2004 there have been 18 mergers and acquisitions among our financial institutions, with particularly good results in the consolidation of state-owned banks. This has reduced the number of financial institutions in which the government holds a stake from twelve to six.  Broadening market access and attracting foreign investment The abolishment of the 12-year-old QFII system in September 2003 meant that Taiwan’s stock market was fully opened to foreign investment.

14. 14 Total Accumulated Net Inward Remittance 3. Enhancing the Confidence of Foreigners Abolished the screening system for qualified foreign institutional investors (QFII) Source: FSC Unit: US$ billion

15. 15 4. Enhancing The Participation of Institutional Investors Source: FSC The Proportion of Institutional Investors’ Trading Value on TSEC Market (%)

16. 16 5. Improving Asset Quality  A substantial improvement in the profitability of Taiwan’s banks is likely to be further strengthened by the industry’s improving asset quality. Basic Financial Data on Taiwan ’ s Banking System (%) End of Year 199819992000200120022003200420052006 (1~4) ROA0.600.500.480.27-0.480.220.630.300.12 ROE8.005.906.193.60-6.933.5210.304.811.95 CAR10.5811.1710.7510.4010.6310.0710.6710.34 ─*─* ROA = Return on total Assets. ROE = Return on stockholders’ Equity. CAR = Capital Adequate Ratio. * : released per half-year Source: The Financial Supervisory Commission

17. 17 Stocks held by foreign entities Source: Financial Supervisory Commission, Executive Yuan. % of total market capitalization

18. 18 The government’s main targets for Taiwan’s economy in 2006 include a GDP growth rate of 4.5%, the CPI to rise no more than 2%, and the unemployment rate to stay below 4%. Through the innovative development of manufacturing and services sectors, Taiwan’s nominal per capita GDP expected to double from US$16,000 in 2006 to US$32,000 in 2015. The goal of Taiwan’s financial reforms is to develop Taiwan as a regional financial center through the efforts of liberalization, privatization and consolidation. Successful privatization and consolidation requires an open and transparent process and is based on sound financial supervision and corporate governance. Ⅳ. Concluding Remarks

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