Taiwanese financial institutions face little risk of losing money from increased leveraging to buy stocks, including shares traded in the volatile mainland China markets, despite a warning from Fitch Ratings last month, analysts on the island say.
Taiwanese brokerages that lend money for shares are often owned by holding companies that can absorb any risk and governed by effective caps on borrowing, people in the financial sector say. They said leveraging is riskier in other Asian markets, such as South Korea and mainland China, as Taiwanese prefer to invest in equity funds rather than pick stocks.
Taiwan’s strength in the face of a finger wagging June 10 from one of the global financial sector’s top rating firms would point to maturity of regulations, financial products and investor savvy.
“Taiwan’s leveraging rate is rather low compared to other Asian in markets,” said Alex Lee, founder and chief executive officer of Taipei-based greater China financial advisory Quantum International Corp. “I don’t think Fitch’s comments are quite fair.”
Fitch Ratings said the “risk profiles” of Taiwan’s largest securities firms could be hurt as they grow offshore and raise leverage. Leveraging refers to borrowing capital, such as profits from stocks, to raise possible investment returns. The practice also magnifies any losses in the stock market.
Taiwan’s brokers have increased leverage and overseas exposure since last year as the domestic stock market remains “subdued” but interest rates stay low, the London and New York-based ratings firm said. Their revenues from offshore grew 29 per cent last year, up from 17 per cent a year earlier and 22 per cent in 2012, the June report said.
Some of Taiwan’s leveraged investment ends up in mainland China, where shares had gained 150 per cent over the year to June but fell sharply in the second half of that month, an example of widely feared volatility in the market that some believe has formed an asset bubble.