ASIAN AFFAIRS ON TAIWAN Yen Ching-chang - Minister of Finance I AM CONFIDENT THAT WE WILL DO OK (Summer 2001) (yet Taiwan's economic performance has been disastrous!) Serge Berthier (SB) - How do you rate the economic performance of Taiwan since the 1997 crisis? Yen Ching-chang (YCC).- In the first quarter of this year, the economic growth was only 1.06 per cent. This doesn’t meet our expectations, but I’m still quite confident that the economy will do well (1). If you look back at 1997, the Taiwanese performance during the economic turmoil caused by the crisis was quite stable. It was due to our strong fundamentals. (Note: two weeks later, the Minister had to admit that Taiwan was in deep recession with its worst economic performance for the past twenty six years). SB.- That is economic jargon. Taiwan is essentially an export-oriented economy doing well when the rest of the world is doing well. That is not the case today and the turmoil of 1997 did not stop on the shores of Taiwan. YCC.- Taiwan is an export oriented economy, so we did suffer as well. In 1998, some large Taiwanese corporations were in difficulty and for the past one and a half years or so, you could see a clear slow down of the US economy which is Taiwan's first export market. This causes difficulties which affect ultimately our domestic economic performance. Our exports have dropped by more than ten percent and it is a concern. SB.- Some experts attribute the current slowdown, not only to external factors but also to the government's poor economic management. YCC.- The presidential election, last year, the transfer of power from the KMT to the DPP have affected the economy. During this process of transition, the governing party and opposition parties were in a confrontational situation, especially in the legislature. That didn’t give confidence to the economic actors. SB.- The confrontation does not seem to be over, since a new election is to take place at the end of the year. Can the economy recover before that? YCC.- There are many signs already that show that the US economy will recover, if not in the second part of this year, at least early next year. Our economy will soon benefit from this recovery. Besides, the Taiwanese government will allocate some complementary budgetary resources to a number of infrastructure projects (2) and will adopt other incentives to foster our internal demand. We hope that these actions will stimulate the economy. As a whole, I would say that, despite a few large corporations encountering real financial difficulties, our fundamentals are still there (3). SB.- You mentioned the confrontational mood that is prevalent between the ruling party and the opposition which controls the legislature. Does it seriously affect the economy? YCC.- Yes. We have some reform bills that have still to be passed, and are waiting in the chamber (4). For the time being, we simply cannot get them through and then of course that’s the price we probably need to pay. The media are highly critical of the situation. Nevertheless, I believe that our system is mature enough and the Taiwanese people patient enough to understand what is going on. We are becoming a full democracy in Taiwan, but are still far away from the standards of democracy of Europe and the US. However, the direction is clear. We will get more and more experienced. A decrease in the confrontational mood between the DPP will happen in the future. That will be a very important foundation for the stability of the society as well as for our economic development. SB.- Among all the economic problems that you are dealing with, which one do you put at the top of your list? YCC.- It is the situation of the financial sector. It has been badly affected by the failure of large size corporations. From the second half of 1998, the average bad loan ratio of our banking sector has increased year by year. For instance, end of 1997, the ratio was about 3.93 %. But end of last year it was 6.2 %. It had increased nearly 100%. Although that level is still quite reasonable, you cannot prevent people from saying that Taiwan is the next on the list to explode!
SB.- But since then, Taiwan has embarked on a reform of its financial sector. YCC.- When I became Finance Minister in October 2000. I strongly suggested to President Chen that Taiwan implement without delay the financial and banking reform even if the situation looked still manageable and that there was no crisis in sight. For that particular reform, we got the support of the legislature and last year the legislature passed the necessary amendments to our banking law and new regulations to encourage our financial institutions to merge. Soon after, we were able to announce some consolidation in the banking sector. Of course, there is still a lot to do. SB.- The financial and banking sector was in the past tightly controlled by the government and very protected. Moreover the financial institutions were discouraged from being involved in cross-border activities. Do you think that they should be free of all governmental interference and able to work as they want? YCC.- Up to now, we have quite a severe demarcation in those areas. But in November 1999, the US passed the financial holding company law which allows commercial banks to engage in cross-border activities, including insurance and security. We would like to follow the US experience in this regard. And I’m quite confident that the financial holding company bill will be passed by an extra-session of our parliament. Currently, according to the bill on merger of financial institutions, only banks can merge with banks. But under the financial holding company law, banks can consolidate with insurance companies to become a holding company, or a commercial bank can merge with a security firm and become a financial holding company. SB.- Would then such financial holding companies be able to invest in the Mainland as well? YCC.- That is another question. Our forthcoming financial holding companies bill would allow the foreign financial institutions to invest, so that those foreign institutions could merge with our domestic financial institutions and acquire 100 % of the domestic capital. Of course, they can also utilise a financial holding company to have an establishment in Taiwan. That was the first point. Referring to your question whether our financial institutions would open-up representative offices in China, we haven’t allowed them to open branches or subsidiaries in Mainland China. (Note: such a policy was scrapped under the proposals made on August 26th, 2001. Remains if the proposals will be implemented and how such an application will be processed in China. Looking at the experiences of foreign institutions in China, it is unlikely to see branches of Taiwanese banks to be able to operate without a long probation period with a "representative" office first being in place). SB.- A Taiwanese company in China with a production factory cannot deliver its goods in Taiwan against an irrevocable letter of credit. A representative office cannot issue a letter of credit. The company can't use a Taiwanese bank and will use a Hong Kong bank. Does it make sense in a globalized world? YCC.- It's possible that the company will use a bank based in Hong Kong. As you have mentioned, representative offices do not have the possibility to issue letters of credit. SB.- Therefore the trade across the Strait is financed using institutions that are not Taiwanese. Is it sustainable? YCC.- From that point of view, I certainly agree with you that it is a problem, but if you consider the same question under another angle, the conclusion would be somehow different. SB.- You mean the political angle ? YCC.- Not specifically. Political consideration of course retains our attention, but from the consideration of financial supervision you will get another appreciation. For instance, if we allow our financial institutions to open-up branches in the Mainland, what will be the supervising and regulatory authority? For branches of foreign institutions in Taiwan, their headquarters being situated in other countries, it would certainly be possible to come to Taiwan to engage in their necessary control and financial supervisions. And of course the branches here have to be supervised by our competent authorities. The concurrent financial supervision, internal and external, should be applied to any foreign branches. That is the rule applied to every corner in the world. But if we open-up our financial institutions in the Mainland, it means that our branches are to be supervised by the Chinese authorities.At the same time those branches have also to be controlled by our authorities. Here you can see the problem. The Chinese government, up to now, does not recognise even the existence of the government here in Taiwan. How could it recognize the financial authorities that are part of the Taiwan government (5)? SB.- Nevertheless, when an International Monetary Fund (IMF) meeting was held in Shanghai, the Chinese government being the host, your minister for Economic Affairs was invited. So there are ways to overcome such technicalities. YCC.- Our Minister of Economic Affairs attended a IMF summit in Shanghai. But Minister Lin (6) received a letter of invitation in which no reference was made about his position as Minister. It was libelled “Mr Lin,...” (7). SB.- Do you think that if the economy was more open and less restricted, Taiwan would attract more investments (8)? YCC.- It is not an easy question to answer. What you have in mind is that the restrictions impeded the economic development of Taiwan. But our government has a proper understanding on this matter. Since Beijing is still so hostile towards Taiwan, for the sake of national security, it is necessary to maintain some measures. From a purely business point of view, it may seem silly that we do not allow any opening-up of our financial institutions in mainland China. Some would say it is not a very smart decision, but even if we allow branches to operate, Beijing will embargo our financial supervisory authorities. Therefore it would not meet the requirements to do so for our supervisory authorities to engage in it (9). SB.- There probably could be ways to maintain the necessary supervision. Why don't you discuss that specific issue among technicians and the banking supervisory authorities? YCC.- Even if we find a way, such decisions would not be understood by Taiwanese people. More and more capital would be channelled to the Mainland and I consider that the government still needs to undertake some limitations in order to maintain our national security. But we are talking about the financial sector. For the manufacturing sector, it is different. Our enterprises manage their operations in a globalized world, and probably we need to allow them to have manufacturing capabilities in the Mainland. In this regard, our government is going to take some step-by-step measures to liberalize its policy. SB.- It means more investments in production facilities going to the Mainland… YCC.- I don’t consider that would cause a problem because it does not affect the whole of the economy but only some specific sectors such as the high-tech industry. This industry has been quite competitive in international markets and I don’t consider that Mainland China can threaten our position in this field in the years to come (10). Our strength is mainly due to the fact that we have a cluster in this particular area. Now there is a point I would like to stress. Taiwan still atracts a lot of foreign direct investments (FDI). Since last year we had a net increase in our security market of 8. 7 billion USD. At the end of May 2001, we received a further 5.2 billion USD. So the low bad loan ratio we have and the inflow of investments in our security market indicate the strong confidence foreign institutions and investors have in Taiwan. SB.- By the same token, foreign institutions and investors have a strong confidence in the People Republic of China, since the investments top 40 billion US dollars, while the Taiwanes authorities still bet on the weakening at some point of time of the Mainland. Isn'it paradoxal? YCC.- That’s good for the PRC. But as I explained, while we have serious concerns in this regard, we consider that we need to accept some necessity due to the globalisation factor. SB.- Globalisation means primarily more competition and more cost-effective measures. Since margins are not high, transport costs are important. Can Taiwan afford so much for an elusive and doubtful political gain? YCC.- How do you create the direct linkages in terms of transportation that you call for? Take the checking counters for departure. The international practice is to check whether you have a visa. Could you imagine if we established the direct linkage, especially for air route with each side checking that? How could Mainland China accept our stamp? I do believe you can understand some surrounding factors which can become some kind of obstacle for the establishment of direct linkages between the two sides. However, sea transportation would be easier to handle. But here, this is a matter of "give and take" philosophy. The PRC needs to do something to promote a much more friendly relationship with Taiwan. (Note: Only weeks later, the August 26th proposals will precisely put an offical end to that sort of dilatory answer). SB.- Yes, it is a "give and take" situation. But China is growing faster than Taiwan, so the "give-and-take" attitude does not pay off. YCC.- I’m not quite sure about that but how could we ignore the very negative attitude of the PRC toward Taiwan? SB.- China does not seem to discriminate against the Taiwanese companies when it comes to economic matters. We are not in the domain of political sensitivities. YCC.- Sometimes things interact with each other... SB.- In Taiwan certainly, but when I am talking to the Minister of Finance, I wish we could talk about economic and financial matters in an objective way. We all know that there is a political issue, but how can we assess the economic issues that are at stake if we don't look at them for what they are? YCC.- I don't think we can do it. I agree that we have to face what globalisation and liberalisation imply for our economy and our private sector, but the relationship between Taiwan and mainland China is so extraordinary and unique in the world, that you have to look at it in a special way. I don't know of another situation like this one in the world? SB.- Indeed. There is only one China! YCC.- So, I would say that for some consideration of national security, we need to sacrifice some economic benefits. SB .- That’s the cost to pay? YCC.- That’s the cost to pay (11) (Note: In fact, the cost to pay was to be contradicted by facts. Weeks fater the interview, Yen Ching-chang is asked to implement policies that he could not implement as long as the PRC had a negative attitude towards Taiwan. The problem is that the attitude of China has not changed. Should we conclude then that for some economic benefits Taiwan had in August to sacrifice some consideration of national security?) Notes 1.- The official economic growth rate was then 4% for 2001. Actually it ended being negative with a plunge in the exports (-10%). The economic performance was the worst of the past twenty years. 2.- An additional budget bill has been proposed in early 2001 as a mean of increasing government spending and stimulating domestic demand. While the Executive Yuan had originally proposed NT$80 billion for the budget, two controversial items totalling NT$18.4 billion (including the NT$5.3 billion) were cut and three others totalling NT$7.3 billion were frozen by the opposition-controlled legislature. 3.- Nevertheless the collapse of investment in US information-technology industry and flagging world trade means that the Taiwanese economy registered its biggest decline in 26 years during the second quarter of 2001, contracting 2.35 percent compared to the same period of last year. The second-quarter dip was the lowest quarterly growth figure since the negative 4.26 per cent in the first quarter of 1975. An annual contraction, which is now likely, would be unprecedented in Taiwan's post-World War II history. The high degree of dependence of Taiwan's informatics, telecommunications and other high-technology industries on the US market had pulled down merchandise exports by 13.7 per cent in the first seven months of the year and triggered a similar decline in industrial production. Another drag was lagging domestic private investment and consumption confidence. The continued drop in value of the Taiwan stock market and rising unemployment - to 4.2 per cent in the second quarter - bred caution in spending - holding real growth in private consumption expenditure to just 0.98 per cent in the second quarter. Given the poor export prospects and rising domestic uncertainty, many companies were contracting production and delaying or cancelling new investment plans. This led to a forecast decline of 14.6 per cent in inflation-adjusted private fixed capital investment this year. Analysts said the second quarter data added to pressure on the government to undertake painful structural reforms and open its economy further to the Mainland. Hence the August proposals that the government must now implement against its own wishes. 4.- The Financial Holding Company Law, which is expected to spur consolidation among Taiwan’s more than 500 banks, brokerages and insurance firms, was passed at the Legislature on June 28th. In addition, government officials anticipate that the creation of holding companies will attract foreign capital to Taiwan. But the holding company law also includes a “sunrise clause” meaning that it won’t take effect until a proposed Financial Supervisory Board is created. The board would have broad supervision over the financial industry and lawmakers say they plan to pass legislation allowing for its creation by Nov. 1, 2001. Until then, no licenses for holding companies will be issued. Market watchers say five to ten financial holding companies are likely to spring up in the next 12 months, so that the top three banks in Taiwan will control more than a 50 percent share of the market in the future. 5.- But the Cabinet would consider allowing Taiwan banks to open branch offices in China, if Beijing allows Taipei to send officials to monitor the banks’ performance in China. 6. – Minister of Economic Affairs, Lin Hsin-yi. 7.- The official name for Taiwan in international forums is “Chinese Taipei”. 8.- The Ministry of Finance, the Mainland Affairs Council and the Central Bank have been working on a control mechanism to prevent massive capital outflows to China and to repatriate business earnings. Despite the government’s good intentions, however, the “no haste, be patient” or “go-slow” policy and the capital control mechanism will not solve the problems and may even backfire. First of all, in the era of globalization, it is impossible for Taiwan to control capital flows unless it is willing to cut all transnational capital flows and trading. In the development of cross-strait trading in recent years, Taiwanese investments in China have always run ahead of government regulations. Eventually the government was forced to face reality and change its policies. For example, in 1997, the government requested businessmen to register all their previously unregistered investments in China. Previously unregistered investments were US$4.7 billion, an amount equal to 73 percent of the accumulated value of the investments that were officially registered at the time of the government’s request. Since the “no haste, be patient” policy was first advocated in 1996, some large companies have found it more difficult to invest in China, but their enthusiasm for going westward cannot be allayed. Furthermore, they have turned investments in China into an underground business. By the end of last year, the registered volume of Taiwanese capital invested in China was only US$17.1 billion, while Chinese statistics showed the figure to be US$25.6 billion. But the Central Bank estimate was as high as US$50 billion, almost triple the official figure. In fact, due to the no haste, be patient policy, many businessmen are unwilling to register their investments with the Ministry of Economic Affairs. Some remit money to holding companies registered in countries which provide preferential tariffs before investing in China. In 1995, Taiwanese investment in British territories in the Caribbean only accounted for 15 percent of total Taiwanese investments in foreign countries that year. But in the first half of last year, the figure rose to 31 percent, making those territories the second biggest investment location for Taiwan — second only to the 37 percent in China. At the beginning of this year, Grand Pacific Petrochemical Co and Macronix International Co separately invested US$82 million and US$75 million in holding companies in the Virgin Islands, while Yageo Corp invested US$250 million in the Bermudas. Actually, a large amount of the above Taiwanese capital flowed to China. In 1995, the Virgin Islands’ investment in China only amounted to 0.8 percent of its total direct investment that year, but the figure rose to 9.7 percent by the first half of last year. The Virgin Islands surpassed the US and Japan to become the second largest source of foreign capital for China, second only to Hong Kong. 9.- The use of the word "hostile" is understandable. Beijing has recently barred the Zurich-based Credit Suisse Group AG from participating in deals in China after one unit of the group organized investment forums in Europe and Hong Kong in which Yen Ching-chang took part. The decision has caused several other banks to drop similar arranged trips. However, some observers pointed out that the level of involvement of the CSFB's top representative in Taiwan, Jaw Sheng Kong with the DPP establishment was probably the main reason behind Beijing's decision. In May 2001, Mr. Kong escorted Mr. Yen to Washington. 10.- Not exactly. Taiwan’s information technology (IT) hardware production value amounted to US$47 billion last year, with nearly 50 percent, or US$23 billion, of that figure being generated by Taiwanese businesses’ foreign factories. That means many Taiwanese computer manufacturers have relocated their production bases overseas. In addition, China became the world’s third largest IT hardware maker last year, with its production value topping US$25.5 billion — beating out Taiwan for the first time. Actually, Taiwanese firms based in China accounted for an estimated 70 percent of that figure, according to a report conducted by III’s Market Intelligence Center. It’s no doubt that much of Taiwan’s IT hardware production is manufactured in China and such moves are definitely accelerating. 11.- The extreme reliance of Taiwan's economy on Japan and the United States has created a visible divergence between the economic performance of the "two" China. While Taiwan's gross domestic product dived to a 26-year low during the first half of the year 2001, the mainland economy, by comparison, grew 7.9 per cent. One of the main reasons for the divergence is that exports accounted for about 44 per cent of Taiwan's GDP, while they make up a little more than 20 per cent of China's GDP. In response to the global economic slowdown, Taiwan's export orders have posted monthly falls in the first few months this year except in February, when they bounced back to the black due to seasonal factors. Taiwanese exports fell 28.4 per cent last month from a year earlier. In the meantime, mainland exports have declined to a year on year 14.6 per cent in the first quarter and 4.6 percent in the second, down from the soaring 27.8 per cent growth last year. However Mainland export growth, having sunk into the negative zone in June, has recovered to last month's 6.6 per cent year-on-year growth On the investment side,Taiwan saw a year on year 22.11 per cent fall in foreign direct investment (FDI) in the first half, while domestic investment dropped as manufacturers relocated their production to the mainland. But China posted a 20.53 surge in actual FDI in the same period. China's vast domestic market can also help cushion the shocks. Mainland retail sales strengthened by 9.8 per cent last month, just below June's 10 percent growth year on year. | |||
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