AmCham 
Publications Topics Archive Topics Archive 2006 Vol.36- No.12 Editorial: The 40% regulation's Negative Impact
Publications Topics Archive Topics Archive 2006 Vol.36- No.12 Editorial: The 40% regulation's Negative Impact | Editorial: The 40% regulation's Negative Impact |
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The 40% regulation's Negative Impact Some observers have expressed surprise at AmCham's concern over the level of restriction the government imposes on investments in China by Taiwan enterprises - the so-called "40% rule." After all, the regulation in no way restrains how multinational companies carry out their China investment strategies. But the ceiling does have a substantial impact on the health of Taiwan's capital markets, which has a major bearing on those in the financial sector, as well as on the overall vibrancy of the economy, affecting everyone doing business here. The regulation is often described as limiting a Taiwan company's investment in China to no more than 40% of its net worth. In fact, it is slightly more complicated than that. It sets an investment cap of 40% of the net worth up to NT$5 billion, 30% of the net worth from NT$5 billion to NT$10 billion, and 20% of the net worth exceeding NT$10 billion. Small and medium enterprises face an absolute ceiling of NT$80 million. Considering the rapid economic growth occurring in China and the substantial business opportunities that has created for Taiwanese investors, an increasing number of companies are bumping up against the investment ceiling. That is not deterring their continued expansion on the mainland, however, since the globalized economy offers a variety of channels for carrying on business activity. Instead, many companies have been spinning off divisions that concentrate on China operations and listing them on the Hong Kong stock exchange. Others are delisting in Taiwan altogether. The main result is to sap the strength of Taiwan's financial markets - thus undermining the government's own avowed objective of building the island into a regional center for fundraising and asset management. The recent bid by the Carlyle Group to take over Advanced Semiconductor Engineering (ASE) has brought to light another dimension of the problem. The Carlyle offer price was 10% higher than ASE's domestic share price at the time, and the price of the company's shares listed in New York rose 15% on news of the bid. As Michael Kurtz, senior managing director at Bear Stearns Asia, noted in an analysis in the Wall Street Journal Asia, much of the "value proposition" behind the buyout offer is the opportunity for ASE to reorganize as a foreign entity and become exempt from Taiwan regulations restricting investment in China - not only the 40% rule but also other limitations on technology companies. The 10%-15% differential provides a measure, which could be applied to a host of other companies, of what Kurtz calls the "lost economic value" that derives from the "government's China-averse posture." Kurtz's article is reprinted in this issue on pages 47-48. Perhaps as the American Chamber we should actually welcome this chance for multinational companies to buy up good local companies at bargain prices. But in fact, we regret to see conditions that day by day are draining Taiwan's economic vigor. Several bills to relax the cross-Strait investment rules are currently before the Legislative Yuan. Once again we urge that the narrow political agenda of minor parties not be allowed to block an important step to ensure Taiwan's continued economic relevance. |
