Taiwan: Integration imperative

More than a month has passed since the students protesting against a trade deal with China vacated Taiwan's parliament building, but the dust has yet to settle.

The near three-week occupation was in opposition to the Cross-Strait Service Trade Agreement (CSSTA) between Taiwan and mainland China. Signed last June but yet to be ratified by parliament, the students wanted the pact scrapped and the introduction of a law allowing legislators to scrutinize any future agreements line by line.

They departed when the Legislative Speaker said he would not preside over a debate on the agreement until proper oversight measures are in place. However, the issue remains uncertain. The brouhaha created by the CSSTA and, more recently, by nuclear power, has distracted parliament, leaving other legislation in stasis.

This includes amendments to Taiwan's Business Mergers and Acquisitions Act that potentially mean greater clarity on the regulatory treatment of take-private transactions. PE investors are watching with interest, keen to target the sizeable buyouts that have been conspicuous in their absence in recent years.

The amendments will eventually be passed but what remains to be seen is whether the recent positive noises emanating from the Financial Supervisory Commission (FSC) regarding foreign buyouts translate into action.

Stick and carrot

Industry participants see a link between the regulator's willingness to engage and the government's desire to accede to the Trans-Pacific Partnership (TPP), a commercial agreement currently being negotiated by a string of Taiwan's trading partners. Liberalization is the price of entry. But are tensions arising from the CSSTA likely to dissuade foreign investors from negotiating with Taiwan, threatening potential free trade agreements (FTAs), the TPP and the government's appetite for reform?

"Taiwan wants to sign more agreements but this is less likely became of the delay in the CSSTA," says C.Y. Huang, president of FCC Partners and chairman of the Taiwan M&A and PE Council (MAPE). "If this agreement can't be promulgated, other countries will become concerned; and it leaves other agreements up in the air. This is highly damaging to Taiwan, especially the financial services sector."

This concern that the storm over the CSSTA will spill out of its own teacup and cause havoc in others is not shared by everyone. However, there is no dissention as to the importance of the TPP to Taiwan's economic prospects.

"Shortly after the president identified TPP as a goal in his New Year address and said he would instruct his ministries to look into the reforms needed, we received word that the FSC wanted to speak to us," says William Bryson, chairman of the American Chamber of Commerce in Taipei's (AmCham) private equity committee. "After a few minutes of pleasantries they started talking about all the stuff they were going to do."

Ever since the rejection of KKR's bid for listed electronics components manufacturer Yageo three years ago due to concerns about the price and protection of minority shareholders - despite a majority of minority shareholders accepting the deal - MAPE and AmCham have lobbied the regulators for greater transparency.

First, they want guidelines on foreign investment criteria, rather than vague regulatory touch points, ranging from the need to preserve national economic security to concerns about the impact on supply chains. Second, they want a list of sectors and companies in which foreign PE investment is unwelcome. Third, deal assessments should follow a specific timeline, and fourth, if a transaction is rejected the FSC should provide a detailed explanation.

At the meeting, the FSC indicated that it would address most of these items. It also endorsed the approach proposed in the amendments to the M&A Act: Take-privates could go through if approved by an independent committee assembled by the target company and accepted by at least two thirds of shareholders.

"To interpret it as anything but a turnaround would be foolish and ungrateful," Bryson observes.

The change in attitude also coincides with new leadership at the FSC and a general acceptance that Taiwan must do more to attract foreign capital, including PE money. Since 2011, there have been no PE investments over $50 million.

The big one

But the TPP link cannot be ignored. This is no ordinary trade agreement; it includes the standard clauses designed to free up the movement of goods across borders, but also encompasses the rules and other structural nuances of individual countries that could place foreign investors and service providers at a competitive disadvantage. Indeed, the TPP is likely to include measures that protect investors and allow them to seek international arbitration if they feel they have been treated unfairly.

As Richard C. Bush and Joshua Meltzer of The Brookings Institution Center said in a note published earlier this year, "the emphasis is on creating a level playing field for all players and providing as much transparency as possible."

The implication is that Taiwan's foreign investment criteria wouldn't be up to standard. It is one of numerous areas that require attention. Taiwan is some distance from even being considered as a negotiating partner for the TPP, but it must take the appropriate steps.

The island state has largely been left behind by the wave of FTAs sweeping Asia - it has two while South Korea has agreed 10. The TPP would amount to a superior pact with New Zealand, Chile, Singapore, Brunei, the US, Australia, Peru, Vietnam, Malaysia, Canada, Mexico and Japan. These nations represent 650 million people, 40% of global GDP and one third of world trade.

Participating in emerging regional trade blocs - notably the TPP - would maintain the competitiveness of Taiwan's products and services and "avert the chilling risk of commercial isolation," AmCham said in its 2013 White Paper. "It is vital for the authorities both to convince other countries of Taiwan's commitment to trade liberalization and to build widespread domestic public support for more open markets."

The price of compliance may be high but the cost of missing out would exceed that of a delayed or dumbed down CSSTA.

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• Topics
• Greater China
• Regulation
• Buyouts
• Taiwan (China)
• China
• regulation
• FDI
• buyout
• Southeast Asia