The Taiwan Stock Exchange plans to merge with the island's smaller bourse and futures market, creating a "one-stop service" in an attempt to draw overseas investors and stem an outflow of companies.
"The integration of those markets is very urgent," Chairman Gordon Chen said in an interview in Taipei. The exchange has to provide a "one-stop service for investors to improve efficiency and lower costs," Chen said.
Chen is trying to halt the loss of companies to exchanges such as Hong Kong's, which don't have the same restrictions on investments in China, Taiwan's biggest export market. Taiwan's stock market has grown at one-third the pace of Hong Kong's over the past three years, and investors say a merger of the island's markets won't be enough to close the gap. Taiwan's companies are restricted from investing more than 40 percent of their net worth in China under the island's rules, limiting their ability to profit from the world's fastest growing major economy. China's gross domestic product expanded 11 percent in the first quarter, almost three times the pace of Taiwan's.
The rules also prevent mainland companies from selling shares in Taiwan, depriving the stock exchange of a surge in new listings from China that has benefited Hong Kong. Chinese companies now account for almost half of the value of the Hong Kong market.
"Taiwanese companies have good reasons to list overseas," said Daryl Goh, a strategist at Credit Suisse Group in Hong Kong. "Merging exchanges will not alter companies' need to get around Taiwan's investment limits."
Taiwan Stock Exchange had a net loss of three companies in 2006 and six in 2005, reducing the total to 649, according to the Taiwan Securities Association. At the same time, 13 Taiwanese companies sold shares in Hong Kong the past two years.
Capxon International Electronic Co., a Taiwan-backed company that makes electrical components used in cars and home appliances, this month raised about US$22 million in a Hong Kong initial public offering.
If the 40 percent cap is lifted, "our market size can be enlarged faster than before," Chen said. Taiwan should reduce the "limitations" to lure investors, he said.
The Taiwan Stock Exchange's benchmark TAIEX index has gained 3.5 percent this year, while the Morgan Stanley Capital International Asia-Pacific index has climbed 6.2 percent and Hong Kong's Hang Seng index gained 3.7 percent.
Bourses worldwide are considering mergers and alliances to create larger and more efficient trading platforms.
NYSE Group Inc.'s plan to acquire Paris-based Euronext NV for about US$14 billion would link stock markets in the U.S. and four European countries. International Securities Exchange Holdings Inc. this month agreed to be purchased by Deutsche Boerse AG's Eurex unit for US$2.8 billion.
Taiwan's exchange has a preliminary agreement to merge with the island's Gretai market for smaller companies, Chen said. A merger with Gretai would lift the exchange's market value by 10 percent to US$664 billion at yesterday's prices.
The plan would also involve assuming control of Taiwan's share registry, Chen said. Part two of the plan would involve merger with the island's futures exchange, he said.
The merger would leave Taiwan as the region's seventh- biggest market, having been overtaken by China and India in the past two years. During that time, the stock markets of South Korea and Australia have surged ahead of Taiwan, with the Sydney bourse topping US$1 trillion. Singapore's bourse doubled in size to US$455 billion as it too attracted Taiwanese and Chinese companies.
The Taiwan exchange is considering either setting up a holding company to own the various exchanges or having a share swap to turn the smaller markets into subsidiaries, Chen said.
Taiwan's investment restrictions are a legacy of the island's split with China in 1949 when the Nationalist government fled after losing a civil war in China. Beijing has more than 900 missiles aimed at the island that it regards as a province that must eventually be unified.
"Taiwan is missing out on waves of Chinese companies seeking listing, because of the political disagreements," Johnson Chen, chairman of IBT Asset Management Co. in Taipei, which manages US$2 billion in assets.
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