It's called jiawaiji and, at the moment, it's only frowned upon by Taiwan financial regulators. But managers investing with non-approved overseas monies may soon face hefty fines or be disqualified from trading, the Securities and Futures Commission (SFC) said this week.

SFC chairman Lin Tzong-yeong has told politicians that the commission has finalised changes to the laws governing investments by foreign investors. This follows speculation that some foreign securities firms are the subjects of SFC investigations into companies investing with non-approved overseas monies.

Presently, Taiwan has investment capital ceilings in place for foreign investors with the purpose of protecting the country's currency from what it sees as destabilizing speculative forces.

QFIIs and GFIIs

For QFIIs (pronounced q-phys, qualified foreign institutional investors) the annual remittance allowable in and out of the country is $1.2 billion; for GFIIs (g-phys, general financial institutional investors) $50 million; individual investors $5 million. Any amount remitted above these limits is deemed to be non-approved overseas capital, or jiawaiji, as it is commonly referred to by locals.

The jiawaiji crackdown threats from Lin came after rumors circulated by unnamed SFC officials that some foreign investors are using their accounts with foreign securities firms in Taiwan to trade in warrants and other derivatives above their legal limits, with their brokers' help.

Although breaching the law, these securities firms cannot be effectively punished because under current rules, the SFC has no power to impose substantial penalties other than "administrative orders". These are orders from the prime minister's office that future applications by the violator to expand services be made "more difficult", says Ong Wen Chi, deputy director of SFC in charge of foreign affairs.

Ong declines to confirm on the jiawaiji trading reports. But he emphasizes "99.9%" of foreign investors are law-abiding companies.

Ceilings unchanged

The Taiwan government has in recent years allowed some foreign investors, mainly GFIIs, to open accounts with brokers with the intention of facilitating their settlement work.

In view of foreign investors going over the annual remittance amount allowable, there have been calls for the ceilings to be lifted when Taiwan fully liberalizes its financial markets next year. But Ong doesn't think that is necessary.

First, Ong believes most QFIIs in Taiwan will not exceed the $1.2 billion limit. Second, he argues too much capital inflow may not be good for Taiwan as it is already a cash rich society. "Instead of doing the domestic economy any good," he says, "it may actually destabilize the country's economy."

For GFIIs, who are more likely to go above their annual remittance limit, Ong says they would be able to upgrade to QFII status once they've grown big enough. There are 490 QFIIs and about 2000 GFIIs in Taiwan. To be a QFII, a bank needs to have at least 1000 branches. For an insurer, a minimum of $300 million in net assets is required. Fund managers and securities firms also have to meet similar capital requirements.

That a Brussels-based international bank had its QFII application rejected recently despite its having 1003 branches, demonstrates how stringent the requirements can be.