Taiwan's SWF plan proceeds despite opposition

Government plans to create a sovereign wealth fund in Taiwan are being met with considerable opposition.

In two separate moves in recent days, it has been suggested that a sovereign wealth fund be created out of Taiwan’s central bank reserves, and that the nation’s four big public investment funds be managed under a sovereign fund ‘platform’.

But the central bank has rejected a recommendation made to the government that its foreign exchange reserves, which total US$420 billion, be used to fund a sovereign wealth portfolio.

Chiu Shean-bii, Professor of Finance at National Taiwan University, told AsianInvestor: “It seems the issue was raised by a few economic professors. They argue that the potential higher returns from Taiwan's sovereign wealth fund could be a big help to the government’s budget deficit.” 

He added: “There are also people who think Taiwan should set up a sovereign fund to do strategic investments.”

The central bank issued a statement saying, “If a sovereign wealth fund is necessary, the government should first seek to pass a law for its establishment, management and oversight, so it can operate legally.”

One of the foremost economists supporting the sovereign fund idea is Professor Lin Chien-fu, former chairman of National Policy Foundation’s finance group. Chang Sheng-ford, Taiwan's minister of finance, has also strongly advocated an SWF as a means of funding the country's budget deficit.

Earlier this week, the Executive Yuan, the executive branch of the Taiwanese government, headed by Premier Mao Chi-kuo, announced the creation of a ‘communication platform’ of the ‘four big funds’, to better coordinate the trading carried out by each of the funds. 

The Ministry of Finance confirmed that it would seek to have the four big funds - the Labor Pension Fund, Labor Insurance Fund, Public Service Pension Fund and the Postal Savings Fund – legally structured as a sovereign wealth fund to allow them to invest for higher returns.

However, Professor Chiu said: “A communication platform is not, nor will it become, a sovereign wealth fund.”

Support for the idea of a sovereign wealth fund in Taiwan is by no means widespread. The public would tend to support the central bank’s view that foreign reserves should not be directed towards growth investments. Politicians are anxious to find a way of funding the budget deficit, but support for the sovereign fund idea represents a career risk for most of them.

Professor Chiu thinks the idea is a non-starter: “Personally, I don't think Taiwan can or should establish a sovereign wealth fund. The reason is simple; Taiwan does not have a budget surplus to do the long-term investments most sovereign funds do.”

He adds that although the four big funds amount to NT$10 trillion ($320 billion), “each fund has its own obligation to fulfil, which is very different from national wealth preservation and growth.

“I believe the current management structure of the four big funds should be reformed to increase efficiency and return. But it is not the same thing as combining four big funds into a sovereign wealth fund.”

The central bank’s view is that safety and liquidity tops their list of concerns in the management of foreign exchange reserves: “It is impossible to compare investment returns without factoring in the safety and liquidity of investment targets,” said the bank’s official statement.