“Where water flows, a channel will form,” says Lee Sush-der, chairman of the Taiwan Stock Exchange, when asked about cross-Strait relations.

Financial ties between the Chinese mainland and Taiwan have been steadily improving. The Taiwan exchange is now pushing for more Taiwanese companies based on the mainland and for Chinese enterprises to be listed in Taipei.

Lee said the free flow of capital across the Strait won’t happen overnight, but it is an inevitable trend as economic ties strengthen.

Lee was named to head the Taiwan exchange in February. Prior to that, he was chairman of Taiwan’s Gre Tai Securities Market, the smaller of the island’s two stock exchanges.

Lee served as finance minister during Ma Ying-jeou’s first administration from 2008 to 2012. During his term, he was known as a reform-minded head, who advocated cutting red tape to improve efficiency and who launched a series of reforms, including large tax cuts.

Lee talked with Shanghai Daily about how cross-Strait financial ties could be closer to facilitate burgeoning economic trade.

What are the advantages of TWSE, compared with the mainland stock exchanges and with the Hong Kong Stock Exchange?
Since the relaxation of listing policies in 2008, the TWSE has focused on attracting return listings by Taiwanese companies, as well as welcoming listings by mainland companies. When compared with other overseas capital markets, most enterprises listed in Taiwan are small and medium-sized companies.

TWSE’s core advantages are its well-established initial public offering process as well as lower capital-raising costs, which make the exchange more attractive to SMEs.

Furthermore, the price-to-earning ratio and turnover on TWSE are more favorable toward small and medium-sized companies. According to the World Federation of Exchanges, the Taiwan capital market’s average price-to-earnings ratio was 24 and its turnover was 97.33 percent in 2012, better than regional markets. These factors show that TWSE is a very suitable platform for firms seeking capital for expansion at their initial growth stage. Also, SMEs can choose among different financing platforms, such as the over-the-counter market and the main board, depending on their stage of development.

There are also geographic advantages. Taiwan is located at the center of the western Pacific, close to the dynamic mainland market. Following the signing of the Economic Cooperation Framework Agreement between Taiwan and the mainland, economic and trade flows have flourished.

It is expected that the Executive Yuan, the highest administrative organ of Taiwan, will further relax the listing rules to allow direct listing of Chinese companies as T shares. This would further expand the scale of the Taiwan capital market and promote our economy.

Chinese mainland’s securities regulator announced earlier this year that it will open the A-share market to Taiwan’s institutional investors through a pilot Renminbi Qualified Foreign Institutional Investor program, with a quota of 100 billion yuan (US$16.4 billion). How would that affect financial ties between Taiwan and mainland? With the mainland stock market among world’s worst performers in recent years, how attractive do you think A shares would be to Taiwan investors?

The more we move forward in cooperation and collaboration, the more we can help each other in developing our capital markets and creating new investment models. The fact that both sides of the Strait share a common language and culture — as well as a similar investor structure — enables them to share a unique investment relationship.

The cross-Strait business relationship is growing. In 2012, 5.34 million Taiwanese visited the mainland, while 2.54 million visitors from the mainland visited Taiwan. In terms of business opportunities, around 90,000 Taiwanese companies are operating on the mainland, with 1 million Taiwanese businessmen living there. Currently, Taiwan’s largest trading and export partner is China’s mainland. The value of cross-Strait trade was US$162.2 billion in 2012.

More than 80 percent of Taiwan-listed companies have invested in the Chinese mainland. Therefore, the A-share market will undoubtedly be attractive to Taiwan investors.

China’s mainland in April allowed residents from Taiwan to trade Class A shares. Meanwhile, Taiwan’s financial regulatory body said it will double the amount that mainland institutional investors may invest in Taiwanese shares to US$1 billion. What follow-up measures would you suggest to further facilitate cross-Strait investment?

The development of yuan-denominated exchange-traded funds (ETFs) is a priority. Once the Renminbi Qualified Foreign Institutional Investor (RQFII) regulatory framework is in place, the Taiwan Stock Exchange expects it can start assisting brokers to launch RQFII ETFs within a short time frame. Many participants have expressed interest in those products.

Meanwhile, officials on both sides of the Strait will continue to study how to allow high-quality mainland-registered companies to list in Taiwan. We hope those firms can list with us via T shares. To assist firms in their operational needs on the mainland, the development of the renminbi business is also a priority.

Taiwan initiated a direct yuan clearing system earlier this year. How is the yuan business going in Taiwan? How would Taiwan benefit from the liberalization of the Chinese yuan?

Economic cooperation and mutual benefits have paved the way for Taiwan to become a new offshore yuan clearing center. In August 2012, Taiwan was ranked seventh of 136 countries exchanging yuan payments. In February, Taiwan moved up to No. 4. Nearly 44 percent of all payments made between Taiwan and the Chinese mainland and Hong Kong are now exchanged in yuan.

The next step for the yuan in Taiwan is to expand from a trade settlement currency to an investment currency. Yuan deposits in Taiwan have already exceeded 70 billion yuan. The yuan bond — the so-called Formosa bond — market began in March and has grown very rapidly. At present, five Formosa bonds are listed on Gre Tai, with 3,900 million yuan outstanding. Adding the amount of shelf-registrations, the total has grown to 6.8 billion yuan. Gre Tai aims to hit 10 billion yuan this year. It seems that Taiwan may achieve the target sooner than later.

Following the trend of yuan internationalization, the TWSE is preparing a trading platform for foreign currency denominated financial products to attract companies operating on the Chinese mainland to list and to establish the TWSE as a funding center for high-tech and innovative firms. Additionally, the exchange can introduce more international investment vehicles  to satisfy investors with increasingly diverse investment needs.

The Taiwan yuan offshore market sets in motion a solid opportunity for Taiwan to become a regional funding and wealth management center. This trend will be one to watch.

Shanghai has set a goal to become a world-class financial center by 2015. In your opinion, what strengths does the city bring to that goal? What weaknesses does it have to overcome? What advice would you give Shanghai in pursuit of its ambition?

Shanghai is fast becoming an international financial center due to its strategic location on the Yangtze River Delta and its proximity to regional industrial centers. Shanghai also has a well-developed manufacturing sector with multinational corporations and international businesses moving in.

There are external economic factors that also help Shanghai, including China’s continuing economic growth and its rising economic status, the internationalization of yuan and the acceleration of China’s financial and banking reforms

For Shanghai to continue its progress, China has to address the issues such as the difficulty small and medium-sized companies have in obtaining financing, which is currently pushing them to the underground economy.

There are also challenges in boosting consumer finance.

Shanghai is expecting to become China’s next financial center after Hong Kong.

It is a continuous process to build up the required infrastructure. In the future, Shanghai will no doubt be successful as it moves forward step-by-step.