AmCHam Big Idea: Establishing a sovereign wealth fund in Taiwan

Could Taiwan President Tsai Ing Wen be the leader that stands up to the Central Bank of Taiwan and finally establishes a Taiwan Sovereign Wealth Fund. With nearly 500 billion US dollars in foreign reserves Taiwan could quickly become a major SWF. Three asset management experts discuss the issue on this first of a series from the American Chamber of Commerce Big Ideas Initiative. Guests include Taiwan politician and former Chairperson of the Financial Supervisory Commission and now the Chairperson of the Department of Risk Management and Insurance at National Chengchi University, Professor Jennifer Wang; Silicon Valley angel investor, and CEO of Taiwania Capital Management Corporation, David Weng (Taiwania is a National Development Fund established by the Taiwan government just two years ago.); Our third speaker was the Chairman and country head for Black Rock investment management in Taiwan, Leo Seewald. Leo is currently the President of the American Chamber of Commerce in Taiwan and has been spearheading its Sovereign Wealth Fund initiative.

TRANSCRIPT

Announcer 0:03
You’re listening to the Taiwan matters podcast, in depth discussions on the issues that matter in Taiwan. Here now is your host, Nicholas Gould.

Nicholas Gould 0:15
Hello. This episode of Taiwan matters podcast is the first of a series being done in conjunction with the American Chamber of Commerce in Taiwan, and their big ideas initiative. Today, the big idea we’re talking about is establishing a sovereign wealth fund in Taiwan. A sovereign wealth fund is a state owned investment fund using money raised by the government. Usually its money allocated from the nation’s foreign reserves and invested internationally looking for higher returns to help close budget deficits or for diplomatic objectives. Of the Asian tigers only Taiwan does not have a sovereign wealth fund. To find out why I’m at the AmCham offices in Taipei, with my three guest speakers. They are the former head of the Financial Supervisory commission, and now the chairperson of the Department of risk management and insurance at National Chengchi University, Jennifer Wang; we also are speaking with the Silicon Valley serial angel investor and CEO of Taiwania Capital Management Corporation, David Weng. Taiwania is a national development fund established by the Taiwan government just two years ago. Our third speaker was the chairman and country head for BlackRock Investment Management in Taiwan, Leo Seewald. Leo is currently the president of the American Chamber of Commerce in Taiwan, and has been spearheading its sovereign wealth fund initiative. The big idea of a Taiwan sovereign wealth fund is not new. It’s been debated in Taiwan for years, but has never been able to clear the political hurdles. Perhaps in this post Coronavirus moment in Taiwan, there’s a chance it could happen. President Tsai Ing Wen enjoying high public approval in her second term, broke the long stalled trade talks with the US by removing restrictions over beef and pork imports over strong resistance. Is she willing to use what remains of her political capital to establish a sovereign wealth fund? We hear first from Jennifer Wang on why it has been so difficult to start a sovereign wealth fund and what’s it going to take this time around?

Jenifer Wang 2:40
There were many difficulties encountered before. But I truly believe we should do that. Now is the time to do that. First I’ll talk about the problems first. The first problem is, I think the government is too worried about the change of the structure governancy. Because in the past, all the big funds, like a central bank or pension fund, they are all managed by the government. So we do not have a corporate governance structure under a sovereign wealth fund. Who can make this happen will be the President, Tsai Ing Wen, or our Prime Minister. I think that if it’s a the top down policy it will be changed.

Nicholas Gould 3:24
David, do you agree that perhaps this moment is one where there’s a greater chance? Do you see something happening this time from the Tsai Ing Wen administration?

David Weng 3:34
This is a very interesting topic. Actually, I came back from Silicon Valley five years ago, when I was still in the think tank planning for what’s next for Taiwan. That’s Taiwan Next. I made a suggestion, and I mentioned, sovereign wealth fund. And it was, you know, quite a debate, even within the party. But I think our first step is to form a national investment fund, a capital management fund, which is Taiwania Capital Management, so that is just the beginning of government sponsored, supported, investment fund. And, I think at this moment, it’s, perfect timing, the way I see it’s a perfect storm, because of the U.S. China… you know, not just trade. It’s basically technology and all the other strategic competition with China. And, Taiwan is now in a position to become a U.S. strategic partner in many areas, especially in the investment area. And, I can see a lot of opportunities between the U.S. and Taiwan, especially on the 5G and beyond. Even 6G or satelite based communications. There are so many communication or networking technology that Taiwan should engage with the U.S. in terms of technology development. That’s why I think this kind of money, you need to put a lot of nation power or nation funding behind it, because we are talking about a whole new industry to be formed. And also, because of COVID-19, you can see the biotech or the digital health area there are tremendous opportunituies for Taiwan. And also because of the Hong Kong Security Act situation, there is no better time for Taiwan to jump into heavily investing in technology or innovation based companies. So I agree that is a must do. And it’s overdue.

Nicholas Gould 5:38
Leo, how would you see a Taiwan sovereign wealth fund taking shape? What would it look like?

Leo Seewald 5:45
Nick, as you pointed out earlier, Taiwan has been talking about this for many years, and they have taken steps towards that direction. I mean, Taiwania is a kind of sovereign wealth fund. And and I think its objectives are well suited to the needs of the development of Taiwan, particularly in the tech area and biotech area. And I think that that’s great. But what I’ve been talking about is a little bit different. What I’ve been talking about in terms of a sovereign wealth fund, and that links back to what you mentioned, with Taiwan’s special moment in time right now. So I’ll take a step back… Taiwan’s reputation globally, particularly in the last year has really been boosted. Prior to that Taiwan’s international presence had been deteriorating because of… we all know the reasons why… but how do we make Taiwan relevant in the future? And a sovereign wealth fund, like you see, some of the other countries have people mentioned Temasek, or, the Norwegian fund is more what I’m talking about, I’m talking about an investment into large cap companies, global companies, companies that influence the whole world. I’m not talking about startups or venture capital, which is more what Taiwania does, which is great. But what I think Taiwan needs is to play in the big leagues. If you own a percentage of these large companies, you have influence, you have the ability to see their board of directors, you have the ability to say to them, ‘Hey, have you considered investing in Taiwan?’ Or, are you aware of Taiwan’s importance strategically in Asia. That it’s a democracy much like a lot of the other countries that these companies operate in. And for that reason, when you play at that level, you really connect Taiwan to the world. That’s what I’m talking about. I’m talking about a truly internationally focused, large cap type of investment that Taiwan wants to make. And the other thing that I think is important for Taiwan, the other reason that this is so important at this time, is because the way we’ve invested our foreign reserves in the past has been very conservative. Taiwan has around the fifth largest foreign reserves in the world. They’re huge. I think last November it was 480 billion. I haven’t checked it lately.

Nicholas Gould 7:56
I looked it up today and it was 498 billion.

Leo Seewald 7:59
Yes. Okay, there you go. So, the way we manage this money is too conservative to meet our needs. We have a rapidly aging population. We have pension funds that are going to go bankrupt. We have COVID, which we’ve done very well this time, but God knows if there’s another pandemic, where’s the money going to come from? The way we invest this money now is too conservative, and no institutional investor would accept the returns that our central bank delivers. Now, there’s statutory reasons for that, I understand, but I think Taiwan needs to get beyond that. We need to be more aggressive with this money. And, so a sovereign wealth fund, the type I’m talking about addresses both important needs Taiwan has.

David Weng 8:40
So actually I agree with you. When I mentioned or proposed that part, Taiwania was actually just the beginning. And that’s a compromise. Because we want to do more, you know, go global and connect global connection. So I agree, you know, not just for the startup or not just for the you know, PE fund or venture fund. We should do more to connect Taiwan to the world through the investment.

Nicholas Gould 9:05
Jennifer, I think one of the issues is that Taiwan doesn’t belong to the IMF, and it doesn’t participate in many of these international monetary organizations. And as a result, it always feels that it needs to have extra protection, and therefore is very cautious. Do you see that as the main reason why it takes such a conservative attitude?

Jenifer Wang 9:28
I think for the Central Bank, their strategy is not actually making a return. They are stabilizing our exchange rate. So there’s a different mindset on if we want to make the country’s economy grow or if we want to have a higher influence in international politics. This could be different kinds of leadership, or different kinds of investment strategy professionals. But, under the current status, we do not have that kind of team or investment talent under the government institutions, or government of funds. And, this is very difficult to change. This is why I say, you need to change the personnel or the organization. You need a good talent, new talent, new leadership. But under the current platform, we do not have that connected together. This is not an issue only for the Central Bank, I think, its especially true for the pension funds, because we’re talking about the labor pension fund going to go bankrupt. The investment return is not good enough to match up with the liability growth. So we have been discussing many times about how to use, maybe, an external mandate to improve the return, but because the processes are still under the government control, so these are very difficult if you did not create a new corporate institutional kind of structure, like in Singapore or like in Canada, or in Australia. They have different kinds of teams, different kinds of corporate governance. But in Taiwan, because these are all under government institutions. So we have very strict rules, regulations, and investment strategy. You also have very strict mandate on how to give this money to the external fund. So I think we need to change this. In the past I think it did not happened because the bottom up process. A bottom up process is not going to change this because all the debate is going on in the legislation yen. They cannot resolve this because they have a need for more protections. They need more guarantees? Who can actually guarantee? So, I think if you want a guaranteed 2% deposit rate, it’s now under 1%. So there’s a lot of different mindsets. Talking about the trust, miscommunication, we need to have very strong leadership from the top down. This is why I say maybe the president or the Prime Minister can actually build this team and the leadership and to identify the main issues or main strategy for us to be involved internationally. That we should get better strategy to help the large cap corporations, especially very successful ones for the bio, or for infrastructure. We have already the old age society, we need lots of health care. I think now AI health is very promising. And we have this kind of talent and these kinds of companies as well. So I think it’s time for a mindset change.

Nicholas Gould 12:49
Leo, on the question of talent…

Leo Seewald 12:51
In terms of talent, I agree with Jennifer that we need to get better talent to do that. And, I think, even taking a step back, when you look at the mindset of the central bank, as Jennifer pointed out, it is very conservative, for a number of different reasons. They’re not trying to make money; They’re trying to preserve wealth. But as we said they have to change that for Taiwan to move forward. And I think that’s why we haven’t made progress because we keep getting stuck there. There doesn’t seem to be the political will to touch the central bank. The central bank is stuck in its mode of operation, has been for many years; has had a lot of success in preserving Taiwan’s wealth, there’s no doubt about it. And, you do need some amount of capital to manage Taiwan’s fiscal policy, but you don’t need $490 billion. That’s the point.

Nicholas Gould 13:37
You’re listening to Taiwan matters podcast. I’m your host, Nicholas Gould. We’re talking about establishing a sovereign wealth fund in Taiwan, the first of a series of American Chamber of Commerce Big Ideas, initiatives. We’re speaking with AmCham President Leo seewald; Professor Jennifer Wang; and Taiwania CEO David Weng. We rejoin our discussion with David Weng, on who should be tasked with running a sovereign wealth fund.

David Weng 14:27
If you are asking government officer to do this kind of job, there is no way they want to do it because there is no reward, and just risk, and the risk is too high for them. And, that’s why you cannot bring them on. You know how come they are so conservative? Because they are not rewarded to take any risk. So that’s the big problem. So I agree that we need to create some special vehicle kind of company to manage the wealth, and have the right incentive program and recruit the right talent in the beginning. Otherwise, if you try to convert Central Bank officers, there’s no way you can do any of that. So I think it’s time to recruit globally for people who really has the right skill, or the right mindset to start this kind of investment.

Jenifer Wang 15:17
I think I also agree with David, because it’s very difficult to break down the Central Bank management. If we can do that under [perhaps] a National Development Council? If we can integrate some government pension funds, we can come up with a new source of tax, or new source of money. And, this growth, or investment return, can also be used to subsidise the pension fund deficit. I think you can do it for the long term investment, and then doing what is good for Taiwan’s industry; what is good for Taiwan’s environment, especially for old age, or green financing. There’s a lot of things,

Nicholas Gould 16:03
But what I hear you saying is mostly very Taiwan oriented. I agree that these things are necessary, and Taiwan needs them, but [as] what you were saying, Leo, is that the sovereign wealth fund really needs to be more internationally involved and not really concerned about Taiwan…

Jenifer Wang 16:22
I agree with that, as well.

Leo Seewald 16:24
And I don’t think it’s necessarily exclusive at all. You know, having worked for a number of multinational companies, I can tell you, they don’t generally think of Taiwan. They always think China. China, China, China. They’re not aware of some of the tremendous things going on in Taiwan. And, that’s exactly why I’m talking about international companies. Because if you invest in them, and you have access to the board, and you say, ‘did you know that in Taiwan, we have this expertise’, or ‘we have this company doing this’, they will start to listen. Their focus on fortune 500 companies has traditionally been always on China, how do we develop our mainland strategy that is changing because of some of the geopolitical things you mentioned earlier. And, that’s again, why this point in time is so critical for Taiwan to invest in these companies and go to them and say, ‘Hey, now, things in China are looking a little more difficult. Have you ever thought of Taiwan? Do you know, Taiwan has this expertise? Do you know that Taiwan has these companies that really are world leaders in this area?’ When you talk to them about that, you not only have the access to their board to talk about some of the advantages that Taiwan has, but you can also perhaps ask them to take another look at this place and think about where they’re going to develop their strategies in Asia.

David Weng 17:41
Again, I also see a lot of foreign companies already that see the opportunity, and they start putting their R&D Centers, or even doing more investment in Taiwan. If you look at Google, and you see Microsoft, Amazon, Cisco they are doing similar [actions]. So I can see their opportunity, and how can we use national wealth to accelerate, or to attract a more company. So I think that will be well leveraged to how to bring Taiwan’s visibility, not just visibility, but impact and influence. And I think that Taiwanese has lacked confidence. But, we just need the government to trust these professional to do the right thing for the next generation in Taiwan.

Leo Seewald 18:28
And I think that’s exactly where we struggle, because government needs to take a risk to set up a sovereign wealth fund. They actually need to say, let’s do this. And, as we said before, there seems to be concern; ‘Well, there’s a lot of risk, where’s the upside? In the sovereign wealth fund, the reward is not going to be one year or two years. That’s a reward for the future. Right? So if I’m going to expand my political capital now to do this, I might not be in office anymore when it happens. And unfortunately, democracy also has that problem that people always take short term views, ‘when’s the next election? What can I do to get elected again?’ Something like a sovereign wealth fund takes a lot of foresight and takes some guts that you want to really change the way things are doing. And I hope that the current government will take that move.

Nicholas Gould 19:16
So what would you look for to believe that there’s going to be a change?

Jenifer Wang 19:22
I still believe we need to do that. But this must come from the top down. And I think democracy of a disadvantage is looking very short. And if we are always looking about the short term policy or sort of benefit for the politically, then I think this cannot be done. I think in the past, we already suffer for that. But I hope now it’s time to do that. So if we can set up a new institution, then we can make this happen. Yeah, I hope we can have a good leadership. To do that, and then this is the right timing for us to do that.

David Weng 19:30
I forsee the political situation is becoming stabilized in the next 10 years? That’s the way I see it. And I think the leaders from the top need to make a tough decision to build the consensus on what’s next and really next for Taiwan’s international status, or even for the next generation’s technology development. And that’s a very tough decision. And I think more people need to speak up and need to talk to the the leaders in the government. So I think one day, we’ll be there.

Nicholas Gould 20:44
Do you think that part of the problem that Taiwan has is its willingness to accept, to really embrace an international outlook,

Leo Seewald 20:53
Taiwan traditionally has a quite a protectionist attitude, and you can see it everything from immigration policies to how fishing harbors are used, to the way, the way that the reserves are run by the Central Bank is all there to protect. But, I think that going forward, that has to change, as David said, and I think the young people here also want that to change. And the reputation that Taiwan has gained through COVID, and how well it’s handled, it has really given people here, a kind of boost. And they see the benefits of globalization. The President mentioned that in her inauguration speech (the second time around) the importance of Taiwan becoming more connected. And I think that is a common change in mindset in Taiwan. We just need to translate that mindset into to more activity. I think even the creation of Taiwania reflects that. Taiwania has an office in Silicon Valley. It is a bit more outward looking. But we need to speed it up.

David Weng 21:56
Right? We need to scale up too. To a PE fund.To another level, like the Tamesco fund.

Nicholas Gould 22:04
Yeah, I mean, in terms of levels, Taiwania is like $150 million. And a sovereign wealth fund would be more like $100 billion.

Leo Seewald 22:14
The top 20 sovereign wealth funds are all over 100 billion dollars. So if you take just 2% of our reserves, you’re at 10 billion already. If you go to 15%, you’re at 70 plus billion. So there’s a lot of room there to do something.

Nicholas Gould 22:36
Tsai Ing Wen is in the first year for her second term. She’s already, one would say, used a lot of her political capital to work on this trade deal with the United States. Do you think she still has more political capital left to be able to do something like this?

David Weng 22:56
I think so. I think she is a very aggressive and forward looking kind of leader, courageous, you know, fearless. So first time I talked to her, you know, about five years ago, or even longer than that, about English as the official language for Taiwan. And she took that. And, then she started pushing that. Although the timetable is too slow in my mind. Actually, it could be accelerated a little bit. And, I do think she has that support, you know, to move forward more on the investment side as well. I think she just need a more professional trusted party to give her the advice and give her, you know, the recipe, how to make it successful. And I think she would do it.

Nicholas Gould 23:47
Jennifer, do you do? Are you optimistic?

Jenifer Wang 23:50
I am a little bit conservative about this, because I can see the government problems for those years in the past. But, I think… I hope somebody can really talk to President Tsai. As I say, this is should be top down. So only two person in Taiwan can do that. And we hope that they can see the benefit and the importance and the timing. We can also promote that as well. It’s like a what we are doing right now. I hope I still hope we can make it happen.

Leo Seewald 24:22
I’ve talked to a bunch of ministers on this issue, and I can tell you, they themselves say it has to come from the president or it’s not gonna happen. So we need to convince her somehow.

David Weng 24:34
Yes!

Nicholas Gould 24:38
Well, thank you all very much for being on Taiwan matters podcast, I appreciate it. We’ve been talking with Professor Jennifer Wong Taiwania CEO David Weng, and AmCham President Leo Seewald on the AmCham Big Ideas initiative, establishing a sovereign wealth fund in Taiwan. For more big ideas be sure to subscribe to AmCham’s Topics magazine. The October issue of Topics magazine focuses on energy, reviewing the progress made so far in developing alternative energy sources.

Announcer 25:16
This has been Taiwan matters with your host Nicholas Gould. For transcripts of this show more information on our guests and the issues discussed. Visit Taiwan matters podcast.com. In order to not miss upcoming Taiwan matters podcasts, be sure to subscribe on your podcast app. Thanks for listening