BOOK REVIEW

TAIVAN'S FINANCIAL MARKETS AND INSTITUTIONS: THE LEGAL AND
FINANCIAL ISSUES OF DEREGULATION AND INTERNATIONALIZATION.

By BRIAN WALLACE SEMKOW. QUORUM BOOKS, 1992, (231 Pp.)

Taiwan, the Republic of China ("Taiwan") is one of the foremost
economic success stories of the past thirty years. Numerous statistics
attest to Taiwan's remarkable economic development. As a newly
industrialized country, its gross national product (GNP) is now roughly
the twentieth largest in the world. Its per capita income has grown from
only US$196 in 1952 to over US$8,000 today. Its foreign exchange
reserves, valued at over US$90 billion and rising, are the largest in the
world. In short, Taiwan has emerged as one of the powerhouse
economies of the Pacific Rim.

Following a trail first blazed in Asia by Japan, Taiwan's economic
growth was based primarily on export-oriented manufacturing. Over the
past thirty years, products manufactured in Taiwan, ranging from T-
shirts to electronics, have carved out a significant share of global
markets. The development of Taiwan's financial system, however, did
not keep pace with the island's industrial development. Until quite
recently, Taiwan's financial markets were over-regulated and virtually
closed to foreign participation.

Bruce Wallace Semkow's book, Taiwan's Financial Markets and
Institutions, focuses on the recent efforts of the Taiwanese government
to deregulate, liberalize and internationalize the island's financial
markets. In particular, Mr. Semkow examines legislation passed by
Taiwan's Legislative Yuan in the late 1980's and early 1990's, including
significant amendments to the Banking Law, the Securities Exchange
Law and the statute governing foreign exchange, that was intended to
create a more modern financial system in Taiwan.

Mr. Semkow is a New York and California attorney who, in
addition to having worked at the international law firm of Jones, Day,
Reavis & Pogue and the Royal Bank of Canada, has taught and written
widely on subjects in international law and economics. He writes from
the perspective of a lawyer and not an economist; his book is not, and
is not intended to be, an in-depth economics treatise on the workings of
Taiwan's financial system. Rather, the book mainly addresses the



JOURNAL OF CHINESE LAW

regulatory framework of the island's financial markets and is, as Mr.
Semkow notes in the book's Introduction, directed primarily at the
foreign legal community interested in Taiwanese finance specifically,
and Asian business and finance generally.

The book first provides a helpful general overview of the financial
system and major financial institutions in Taiwan. The overview includes
a discussion of the roles played by Taiwan's two primary financial
regulators, the Ministry of Finance (the "MOF") and the Central Bank
of China (the "CBC"), which should be of particular interest to legal
practitioners. In general, the MOF has advocated the liberalization of
Taiwan's financial markets, while the CBC has taken a more
conservative approach, opposing the reduction of the level of
government control. The book then examines recent reforms of the
Banking Law, the Insurance Law, the Securities Law and the foreign
exchange system. In addition, special chapters are devoted to the money
market, the bond market, Taiwan's status as an offshore banking center
and the regulation of derivative products in Taiwan.

In discussing the Banking Law, Mr. Semkow focuses on the
amendments to the Banking Law which were enacted on July 19, 1989.
These amendments, which modified more than one-quarter of the law's
provisions, affected the banking industry in four principal ways. First,
by permitting the establishment of new private banks and the
privatization of certain of the government-controlled banks, these
amendments increased the level of competition in the banking industry.
Second, the scope of the services permitted to be offered by commercial
banks was expanded. Third, the fixing of interest rates by the
government on commercial bank deposits was eliminated. Fourth, the
restrictions on foreign banks to carry on business in Taiwan were
significantly reduced.

Similarly, the book's discussion of reforms in the insurance
industry focuses on recent amendments to the Insurance Law. These
amendments, which were passed in 1992, have enhanced competition in
the insurance industry by permitting new insurance companies to enter
the insurance market. In particular, Mr. Semkow discusses the efforts
made by United States insurance companies to increase their access to
the Taiwanese insurance market. These efforts influenced the 1992
reforms, which opened up the Taiwanese industry to a limited degree of
foreign involvement.

In the chapter on securities market reform, Mr. Semkow examines
the substantial 1988 amendments to the Securities Law, which, in all,

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BOOK REVIEW

affected roughly one-third of its provisions. Among other things, the
amendments permitted the registration of new securities companies and
widened the scope of the activities in which securities companies are
permitted to engage. With respect to the former, Mr. Semkow notes that
prior to the enactment of the 1988 amendments, the number of
registered brokers was frozen for many years at 28. By the end of 1990,
the increased entry into the securities industry permitted by the 1988
amendments had caused the number of registered brokers to swell to
almost 400.

With regard to the reforms of the foreign exchange system, Mr.
Semkow discusses Taiwan's principal foreign exchange law, the Statute
for Administration of Foreign Exchange ("SAFE"). SAFE, together
with other foreign exchange regulations of the CBC, puts significant
restrictions on the flow of money into and out of Taiwan. Mr. Sernkow
highlights the 1987 amendments to SAFE which increased the amount
of money that can be remitted into and out of Taiwan by individuals and
businesses without government approval.

Certain common themes connect the book's examination of these
different areas. The central themes are that the Taiwanese authorities are
beginning to release their historically tight regulatory grip on the
financial markets and are increasingly opening up the banking, insurance
and securities industries to a greater degree of competition, both foreign
and domestic.

The book also examines the distorting effects that over-regulation
has had on the development of Taiwan's financial system. In this regard,
Mr. Semkow discusses Taiwan's underground financial system, the size
of which was estimated in 1990 to be 57% of Taiwan's GNP. The
underground financial sector, which includes loan sharks, underground
investment houses, rotating credit clubs, and post-dated check
discounters, developed in Taiwan outside of, and in response to, the
government's tight financial controls. Throughout the 1970's and
1980's, the underground sector was the primary source of funds for
small enterprises and individuals that were denied access to the official
financial sector.

For example, Mr. Semkow notes that government-imposed credit
rationing caused banks to lend only to the best credit risks, generally
large companies which could provide substantial collateral. Such
restrictive bank lending policies, together with the underdeveloped state
of the island's securities markets, resulted in an official sector that
provided very few financing alternatives for individuals and small and

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JOURNAL OF CHINESE LAW

medium-sized companies. The underground financial system developed
over time to service their credit needs.

Mr. Semkow points out that one of the primary goals of the recent
reforms was the elimination of the underground financial system. This
goal has been partially accomplished through several different means.
For instance, the amendments to the Banking Law included a stricter
definition of "deposit" and significantly increased the sanctions on illegal
deposit-taking. The authorities have since employed this new legal
weapon to undertake wide-scale prosecutions of the underground
financial industry. In addition, the reforms permitted the establishment
of private banks, which are beginning to provide funding to the types of
small customers that previously have been denied credit by the state-run
banks.

In the Conclusion to the book, Mr. Semkow notes that despite the
Taiwanese government's substantial and on-going efforts to deregulate
and internationalize the island's financial markets, much remains to be
done. Foreign banks and other financial institutions, such as securities
and insurance companies, continue to be denied national treatment. In
general, Taiwan's markets have not been fully integrated into the world
financial system. Moreover, the highly volatile Taiwan Stock Exchange
still shows signs of operating more as a casino for speculators than as
a source of capital for local companies, and Taiwan still lacks a liquid
bond market. The book concludes, therefore, that further reforms are
necessary for Taiwan to create a fully-functioning modern financial
system, let alone for the island to gain a greater regional financial role.

This book provides a thoughtful and well-researched overview of
Taiwan's recent financial reform program. Although the book is not
exhaustive in any area, it goes into sufficient depth that even the reader
who already has a general knowledge of Taiwanese financial law should
find the book helpful and informative. On the other hand, for the reader
with only a general interest in the area, the book is comprehensive
enough that it might make a difficult read cover-to-cover. I believe that
any academic or practitioner with an interest in Asian business and
finance would find this book to be a useful and timely reference work.

Michael S. Bennett*

Associate, Simpson Thacher & Bartlett, Tokyo, Japan.

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