Merging Markets

The Taiwan Stock Exchange announced on May 9 that it is planning to merge with the island's smaller exchange and futures market, GreTai. It is hoped this merger will increase efficiency and make it more attractive for companies to list in Taiwan at a time when some companies are considering moving abroad to rival exchanges.



The chairman of the Taiwan Stock Exchange Corporation (TSE), Gordon Chen, told the local press the exchange needs to provide a "one-stop service for investors to improve efficiency and lower costs".



Chen said the exchange has preliminary plans to merge with the GreTai market for smaller companies. A merger would add 10% to the value of the main exchange, bringing it to $664bn, making the combined exchange the 7th largest in Asia. He said he thinks this will happen within two years. Chen also said he wants the TSE to merge with the islands' share registry and futures exchange. To achieve the merger, the exchange has said it is considering creating a holding company to combine the exchanges or have a share swap which would turn the smaller exchanges into subsidiaries.



Taiwan's stock exchange has grown at one third of the speed of the Hong Kong Stock Exchange over the past three years. Shares listed on Taiwan's exchange are limited by the amount they can invest in mainland China, which is making Hong Kong seem more attractive to companies that want to expand into China.



The Taiwanese government imposes restriction on the amount a company can invest in China with a cap of 20-30% of a company's net worth permitted to be invested, depending on the size of the company.



The cap is designed to limit the amount of investment outflows to mainland China and is a sensitive political issue. The government is concerned that lifting it could negatively affect the economy and cause the loss of jobs in Taiwan as companies move their assets to China.



The Taiwan Securities Association reported that the TSE had a net loss of three companies in 2006 and six in 2005. Thirteen Taiwanese companies have sold their shares in Hong Kong in the past two years.



However, there are ways in which Taiwanese-listed companies can get around the cap. For example, Taiwan's Hon Hai Precision Industries has listed shares of its subsidiary, Foxconn, on the Hong Kong Stock Exchange. Foxconn has no business points in Taiwan and is therefore not immediately affected by the cap. Taiwanese companies have also been targets for foreign private equity funds. Once Taiwanese companies are taken private and owned by foreign funds, they can invest as much as they like in mainland China.



Chen said that if restrictions were lifted on Taiwanese investment in mainland China then the "market size can be enlarged faster than before" thus encouraging investment in Taiwanese shares.



The details of the proposed merger are yet to be finalised and there are still questions over the details. The relationship between the new merged exchange and the government needs to be worked out, as do practicalities such as how to place staff within the combined exchange and how to split responsibilities.



At the beginning of the month, the TSE announced it was considering listing itself as a way of increasing competitiveness. The listing of stock exchanges is a local trend and regional exchanges such as in Singapore and Hong Kong are already listed. South Korea's exchange has announced it will list in June.



According to reports, Singapore and Hong Kong's stock exchanges have grown 568% and 876% respectively since they floated.



It is thought that TSE would need to complete its proposed merger before it could float. Its performance would also need to be improved to encourage investment.



The proposed merger could certainly increase efficiencies and listing TSE in the future could also help. However, some analysts are concerned that these steps would only be of marginal benefit and the best way to boast the markets performance would be to lift the investment cap.