Taiwan's domestic bond market is well known for its contradictory tendencies. Although the overall market is periodically the second largest in Asia behind Japan's (from time to time edging South Korea's market into third place) the volume of trading done is often pitifully small. "When interest rates are falling there is tremendous liquidity," says one local dealer. "When rates begin to rise, securities houses stop trading in the Taiwan market and liquidity shrinks to nearly zero."
Trading houses and underwriters are lobbying the government to make several regulatory changes to remove those hurdles that have stymied liquidity. The requested changes include: a better physical delivery system, the development of an interest rate futures market, permission to perform bond forward trading and short selling of bonds, and most important of all, the abolishment of the 0.1% bond transaction tax.
The authorities appear to be listening. A proposal for a reduction or abolition of the transaction tax is already in the legislative process, says Nicholas Teo, vice-president at Grand Cathay Securities, the largest local bond underwriter.
Several other positive regulatory developments have been implemented in recent months, or are in the works. Chang says an electronic network trading system is due to be up and running early in 2000. At the same time, the authorities are working to simplify the listings procedure. Chang says a new and simpler listing format will be in force from January.
Both the OTC exchange and its sibling the Securities & Futures Commission (SFC) are more circumspect, however, about giving the green light to a bond futures market. "A futures market depends on benchmarks, but because of the current trading problems these are not easy to establish. What we hope is that the new network trading system will enhance liquidity and allow for the development of a proper yield curve," says Chang.
The SFC is more cautious still about forward trading and short selling, believing that market players will simply abuse the freedoms by seeking to boost profits instead of making prudent hedging decisions. However the regulatory body hasn't categorically ruled out either option. "We want to wait until a futures market is established before we decide," says Sherry Hong, section chief at the SFC.
Not everything that the government has done this year has been in the market's favour. From January 1 the government required companies that wanted to issue unsecured bonds to be rated. Most analysts believed that the market would be damaged by the move, first, because of the length and expense of the rating process and, second, because companies that failed to secure a favourable rating might be tempted to keep the verdict under wraps and not issue bonds at all. For all its dynamism, Taiwan's economy is well known for being more heavily dependent on small and medium-size enterprises than other developed countries. There are only a few indigenous, large blue-chip corporations, the sort of companies that would take the cost of a rating in their stride.
"The market is probably down 10% to 20% because of the ratings requirement," says Teo.
Another cloud on the horizon is a proposed non-deductible withholding tax (at the moment withholding tax is deductible at the year-end). The original justification for the levy was to raise additional revenue to stimulate an economy that was slowing because of regional recession. Concerns about an economic slowdown may have gone but a new rationale for a withholding tax has appeared. The central government needs extra funds to pay for rebuilding in the wake of last September's earthquake.
Most foreign financial institutions have steered clear of the Taiwanese bond industry not because of any laws or regulations that protect the interests of the local players, but because of the inability to hedge positions and the low fees. As with many business sectors in Taiwan, the bond market is intensely competitive and for that reason not particularly lucrative.
Only Citicorp has made any significant headway in the underwriting league tables. Citicorp, a relative newcomer, is third place behind Grand Cathay and China Securities.
