Tuesday, April 01, 2008
Straitened times: Taiwan looks to China
By Kathrin Hille
Tuesday Mar 25 2008, FT
After Ma Ying-jeou won Taiwan's presidential election on Saturday, jubilant supporters of his Kuomintang partied at the KMT headquarters all night. Investors were still celebrating when the market reopened on Monday, with stocks rising 4 per cent before easing back slightly on Tuesday.
Behind the exuberance stands the belief that the KMT's return to power could prove a historic moment - that it will put Taiwan on a track to closer economic integration with China, give the island its rightful share of the benefits of China's growth and defuse one of Asia's most dangerous latent conflicts. "The KMT and the Chinese leadership have a common objective: economic development on both sides of the Taiwan Strait and the easing of tension. They will work towards the goal of economic integration and the revitalisation of Taiwan's economy," says Peter Sutton, head of research at the Taipei office of CLSA, a regional brokerage.
Mr Ma (pictured above) says he wants to put disagreements over Taiwan's status aside and start talks with Beijing - first on economic issues and eventually on a peace accord. While China has long claimed sovereignty over the island and threatens to attack it should Taiwan formalise its de facto independence, Chinese leaders have responded by saying they are ready to communicate with any Taiwanese politician who does not actively push for independence.
All of this contrasts sharply with the atmosphere that has prevailed in the Taiwan Strait for most of the past decade. Both Chen Shui-bian, the incumbent president from the pro-independence Democratic Progressive party, in office since 2000, and his predecessor Lee Teng-hui started out with a pragmatic approach to China but quickly hardened their attitude after Beijing frustrated their efforts.
As a result, the semi-official dialogue that started in 1992 - the furthest the two sides had come since the KMT lost the civil war in China to the Chinese Communist party in 1949 and fled to Taiwan - has been cut off since 1998. Arguing that Taiwan must limit its economic dependence on a country so powerful and so politically hostile, Taipei has also maintained a set of rigid rules to restrict the flow of people, goods and services across the Strait.
But now the Taiwanese have elected a president who turns that argument on its head. Mr Ma has pledged to open direct air links with China within a year, allow large numbers of mainland tourists to visit Taiwan, invite Chinese investors to buy Taiwanese property, abolish many restrictions on foreign direct investment in China and do away with rules that tightly restrict investment by local funds in Chinese securities. "China is not only a threat but also an opportunity," says Mr Ma. "We have to maximise the opportunity and minimise the threat."
The reason for the change of heart is economic stagnation. While the island's electronics exporters have thrived and continue to grab market share globally, the domestic sector has suffered as manufacturing jobs move to China, money flows offshore for better returns and multinationals become increasingly reluctant to expand in Taiwan. Taiwanese businesses have watched Hong Kong, South Korea with envy in recent years as they sense that the island, once hailed as an "Asian tiger" alongside the other three, is falling behind.
Indeed, of the four, the island faces the slowest annual growth, forecast at just over 4 per cent. It also trails in terms of per capita income, which stands at some US$15,000 (£7,510, €9,630). Private consumption, which plummeted during the 2001 recession following the bursting of the tech bubble, has not recovered to pre-crisis levels, even though employment growth returned to its historical average. Fixed capital formation as a percentage of gross domestic product is one of the lowest in the region, while property prices have trailed those in Hong Kong, South Korea by a widening margin.
Many economists blame Taiwan's uneasy political relationship with China and its restrictions on economic exchanges with the mainland. The problem, they argue, is not the lack of economic interaction but its distorted nature.
China is already Taiwan's largest trading partner and investment destination. Taiwanese companies have relocated labour-intensive production to the mainland over the past 15 years and their cumulative FDI there might be close to US$300bn, according to the government's latest estimates - which would make Taiwan China's largest source of FDI.
"But the restrictions have so far made economic contacts a one-way street," says Grace Ng, an economist at JPMorgan in Hong Kong. "The ceiling [set by Taiwan] which limits companies' investments in China at 40 per cent of their net worth has failed to discourage them from mainland investments. It has just discouraged them from repatriating profits to Taiwan for the fear of not being able to use the funds for further expansion on the mainland."
Individual investors have showed a similar inclination to take funds offshore and keep them there. Again, analysts argue that restrictions on links with China are at least partly to blame. First, the government bans the sale on the island of mutual funds that invest more than a tiny portion in China-linked equities. Second, the 40 per cent rule has kept companies from listing in Taiwan to raise funds for expansion in China, giving local investors who want to build exposure to China's growth no choice but to move offshore.
As a result, Taiwan saw a US$38.9bn outflow from its financial account last year, which more than offset the current account surplus and resulted in its first overall balance of payments deficit in 10 years.
The ban on direct transport across the Strait has had similar effects. Travelling from Taipei to Shanghai, theoretically no more than a one-hour flight, currently takes more than six hours because travellers must transit in Hong Kong. This means Taiwanese entrepreneurs with investments on the other side of the Strait do not have the choice of commuting between Taiwan and China. Many have moved to the mainland and an estimated 2m Taiwanese now live in Shanghai. "The absence of this group with relatively strong spending power is certainly hurting Taiwan's domestic economy," says Ms Ng.
The ban on direct flights, together with Taiwan's unwelcoming attitude towards Chinese citizens, has also discouraged multinationals from putting more staff and more regional functions on the island. Most analysts expect that to change under Mr Ma. "Taiwan will be opened for Chinese capital and people so that Taipei can become a services centre for Greater China, just like Hong Kong," says Mr Sutton.
Not everyone shares this optimism. "I don't think that [relations with China] are the main problem," says Duncan Wooldridge, UBS's chief economist for Asia. "Taiwan is already the most integrated economy in the world with China; and Korea and Japan share the problem of weak domestic consumption. Why is it that only Taiwan should improve by moving even closer to China?" He predicts that Mr Ma's government will enjoy a honeymoon but will fail to meet the market's expectations in the longer term.
Mr Ma emphasises that links with China are just one dimension of his economic policy agenda. They will be complemented by efforts to push other bilateral and regional trade deals and plans to kick-start domestic demand with a T$4,000bn (£66bn, $133bn, €85bn) infrastructure investment programme.
But unlocking the potential for Taiwan to benefit more from its strong trade and investment links to China is still set to be the key psychological driver in the coming years. Ms Ng believes that the Hong Kong experience could provide a valuable example. "After the handover in 1997, Hong Kong was soul-searching because the perception was that it would become marginalised in Greater China," she says. "Although there are differences, this is the problem Taiwan faces now, too."
Hong Kong's fortunes changed after it signed a Closer Economic Partnership Agreement (Cepa) with China, which allowed the territory's banks to invest in Chinese counterparts and gave approval for residents from several Chinese provinces to travel to Hong Kong as tourists.
In Taiwan's case, economists say the main effects could come from companies giving up their past reluctance to invest at home, as tax changes and soaring labour costs damage the investment environment in China just as Taiwan is expected to become more attractive. "Hong Kong's annual growth post-Cepa has averaged at 6 to 7 per cent, up from 3.5 to 4 per cent before 2003, and a similar effect can be expected for Taiwan," says Ms Ng.
Having seen Taiwan transformed from an authoritarian one-party regime into one of Asia's most vibrant democracies, the Taiwanese reject few things more passionately than comparisons with Hong Kong. The parallels, therefore, cannot reach beyond pure economics. Since martial law was lifted in 1987 and democracy introduced in the early 1990s, Taiwan has gradually discovered an identity of its own. Only a tiny minority of the island's residents now accept the idea of future unification with their giant neighbour.
The twists and turns that Mr Ma has deemed necessary to appear acceptable to voters prove how deep-rooted this new identity now is. In the early phase of his campaign, Mr Ma said that his party's long-term goal remained eventual unification. But he takes the position that, for now, Taiwan is a sovereign country - a view first expressed by the DPP and fiercely rejected by Beijing many times. He also stresses that he will not negotiate over reunification but only over ways to handle the bilateral hostilities.
KMT representatives say the party's focus is and will be on power in Taiwan rather than on any role in a future united China. "Even beyond Mr Ma, it is hard to imagine that any KMT politician would seriously think about unification," says Ho Szu-yin, a political scientist at National Chengchi University who also works for the KMT.
The main difference between the KMT and the DPP could be described as one between realism and idealism. The DPP, a party founded in opposition to the KMT's authoritarian one-party regime in the 1980s, openly advocates Taiwanese independence. The KMT in the past tried to impose a Chinese nationalist ideology on Taiwan and cling to its goal of eventual unification but it has moved to the middle since democratisation for the sake of political survival. "We also love Taiwan, but we love it in a realistic way. We take the view that if we don't have wealth we don't have power," says Mr Ho. "Economic clout is Taiwan's raison d'etre."
That certainly differs from China's long-term objectives. "The Chinese leadership hopes to create an irreversible trend towards peaceful integration," says George Tsai, a professor at Chinese Culture University and one of Taiwan's leading experts on cross-Strait relations. But he believes that China's leaders are happy for now, having been reassured by Mr Ma that formal independence will not be an issue under his government.
Therefore the new start between Beijing and Taipei could be about much more than business, even though it does not put Taiwan on the road towards unification.
Mr Tsai says that by the end of Mr Ma's first term, China and Taiwan could have implemented confidence-building measures such as the exchange of information on weapons deployments and troop movements and the establishment of communication channels between the armed forces to reduce the risk of conflict: "That would be a good start for another four years and far beyond anything that has been achieved ever since 1949."
Tuesday Mar 25 2008, FT
After Ma Ying-jeou won Taiwan's presidential election on Saturday, jubilant supporters of his Kuomintang partied at the KMT headquarters all night. Investors were still celebrating when the market reopened on Monday, with stocks rising 4 per cent before easing back slightly on Tuesday.
Behind the exuberance stands the belief that the KMT's return to power could prove a historic moment - that it will put Taiwan on a track to closer economic integration with China, give the island its rightful share of the benefits of China's growth and defuse one of Asia's most dangerous latent conflicts. "The KMT and the Chinese leadership have a common objective: economic development on both sides of the Taiwan Strait and the easing of tension. They will work towards the goal of economic integration and the revitalisation of Taiwan's economy," says Peter Sutton, head of research at the Taipei office of CLSA, a regional brokerage.
Mr Ma (pictured above) says he wants to put disagreements over Taiwan's status aside and start talks with Beijing - first on economic issues and eventually on a peace accord. While China has long claimed sovereignty over the island and threatens to attack it should Taiwan formalise its de facto independence, Chinese leaders have responded by saying they are ready to communicate with any Taiwanese politician who does not actively push for independence.
All of this contrasts sharply with the atmosphere that has prevailed in the Taiwan Strait for most of the past decade. Both Chen Shui-bian, the incumbent president from the pro-independence Democratic Progressive party, in office since 2000, and his predecessor Lee Teng-hui started out with a pragmatic approach to China but quickly hardened their attitude after Beijing frustrated their efforts.
As a result, the semi-official dialogue that started in 1992 - the furthest the two sides had come since the KMT lost the civil war in China to the Chinese Communist party in 1949 and fled to Taiwan - has been cut off since 1998. Arguing that Taiwan must limit its economic dependence on a country so powerful and so politically hostile, Taipei has also maintained a set of rigid rules to restrict the flow of people, goods and services across the Strait.
But now the Taiwanese have elected a president who turns that argument on its head. Mr Ma has pledged to open direct air links with China within a year, allow large numbers of mainland tourists to visit Taiwan, invite Chinese investors to buy Taiwanese property, abolish many restrictions on foreign direct investment in China and do away with rules that tightly restrict investment by local funds in Chinese securities. "China is not only a threat but also an opportunity," says Mr Ma. "We have to maximise the opportunity and minimise the threat."
The reason for the change of heart is economic stagnation. While the island's electronics exporters have thrived and continue to grab market share globally, the domestic sector has suffered as manufacturing jobs move to China, money flows offshore for better returns and multinationals become increasingly reluctant to expand in Taiwan. Taiwanese businesses have watched Hong Kong, South Korea with envy in recent years as they sense that the island, once hailed as an "Asian tiger" alongside the other three, is falling behind.
Indeed, of the four, the island faces the slowest annual growth, forecast at just over 4 per cent. It also trails in terms of per capita income, which stands at some US$15,000 (£7,510, €9,630). Private consumption, which plummeted during the 2001 recession following the bursting of the tech bubble, has not recovered to pre-crisis levels, even though employment growth returned to its historical average. Fixed capital formation as a percentage of gross domestic product is one of the lowest in the region, while property prices have trailed those in Hong Kong, South Korea by a widening margin.
Many economists blame Taiwan's uneasy political relationship with China and its restrictions on economic exchanges with the mainland. The problem, they argue, is not the lack of economic interaction but its distorted nature.
China is already Taiwan's largest trading partner and investment destination. Taiwanese companies have relocated labour-intensive production to the mainland over the past 15 years and their cumulative FDI there might be close to US$300bn, according to the government's latest estimates - which would make Taiwan China's largest source of FDI.
"But the restrictions have so far made economic contacts a one-way street," says Grace Ng, an economist at JPMorgan in Hong Kong. "The ceiling [set by Taiwan] which limits companies' investments in China at 40 per cent of their net worth has failed to discourage them from mainland investments. It has just discouraged them from repatriating profits to Taiwan for the fear of not being able to use the funds for further expansion on the mainland."
Individual investors have showed a similar inclination to take funds offshore and keep them there. Again, analysts argue that restrictions on links with China are at least partly to blame. First, the government bans the sale on the island of mutual funds that invest more than a tiny portion in China-linked equities. Second, the 40 per cent rule has kept companies from listing in Taiwan to raise funds for expansion in China, giving local investors who want to build exposure to China's growth no choice but to move offshore.
As a result, Taiwan saw a US$38.9bn outflow from its financial account last year, which more than offset the current account surplus and resulted in its first overall balance of payments deficit in 10 years.
The ban on direct transport across the Strait has had similar effects. Travelling from Taipei to Shanghai, theoretically no more than a one-hour flight, currently takes more than six hours because travellers must transit in Hong Kong. This means Taiwanese entrepreneurs with investments on the other side of the Strait do not have the choice of commuting between Taiwan and China. Many have moved to the mainland and an estimated 2m Taiwanese now live in Shanghai. "The absence of this group with relatively strong spending power is certainly hurting Taiwan's domestic economy," says Ms Ng.
The ban on direct flights, together with Taiwan's unwelcoming attitude towards Chinese citizens, has also discouraged multinationals from putting more staff and more regional functions on the island. Most analysts expect that to change under Mr Ma. "Taiwan will be opened for Chinese capital and people so that Taipei can become a services centre for Greater China, just like Hong Kong," says Mr Sutton.
Not everyone shares this optimism. "I don't think that [relations with China] are the main problem," says Duncan Wooldridge, UBS's chief economist for Asia. "Taiwan is already the most integrated economy in the world with China; and Korea and Japan share the problem of weak domestic consumption. Why is it that only Taiwan should improve by moving even closer to China?" He predicts that Mr Ma's government will enjoy a honeymoon but will fail to meet the market's expectations in the longer term.
Mr Ma emphasises that links with China are just one dimension of his economic policy agenda. They will be complemented by efforts to push other bilateral and regional trade deals and plans to kick-start domestic demand with a T$4,000bn (£66bn, $133bn, €85bn) infrastructure investment programme.
But unlocking the potential for Taiwan to benefit more from its strong trade and investment links to China is still set to be the key psychological driver in the coming years. Ms Ng believes that the Hong Kong experience could provide a valuable example. "After the handover in 1997, Hong Kong was soul-searching because the perception was that it would become marginalised in Greater China," she says. "Although there are differences, this is the problem Taiwan faces now, too."
Hong Kong's fortunes changed after it signed a Closer Economic Partnership Agreement (Cepa) with China, which allowed the territory's banks to invest in Chinese counterparts and gave approval for residents from several Chinese provinces to travel to Hong Kong as tourists.
In Taiwan's case, economists say the main effects could come from companies giving up their past reluctance to invest at home, as tax changes and soaring labour costs damage the investment environment in China just as Taiwan is expected to become more attractive. "Hong Kong's annual growth post-Cepa has averaged at 6 to 7 per cent, up from 3.5 to 4 per cent before 2003, and a similar effect can be expected for Taiwan," says Ms Ng.
Having seen Taiwan transformed from an authoritarian one-party regime into one of Asia's most vibrant democracies, the Taiwanese reject few things more passionately than comparisons with Hong Kong. The parallels, therefore, cannot reach beyond pure economics. Since martial law was lifted in 1987 and democracy introduced in the early 1990s, Taiwan has gradually discovered an identity of its own. Only a tiny minority of the island's residents now accept the idea of future unification with their giant neighbour.
The twists and turns that Mr Ma has deemed necessary to appear acceptable to voters prove how deep-rooted this new identity now is. In the early phase of his campaign, Mr Ma said that his party's long-term goal remained eventual unification. But he takes the position that, for now, Taiwan is a sovereign country - a view first expressed by the DPP and fiercely rejected by Beijing many times. He also stresses that he will not negotiate over reunification but only over ways to handle the bilateral hostilities.
KMT representatives say the party's focus is and will be on power in Taiwan rather than on any role in a future united China. "Even beyond Mr Ma, it is hard to imagine that any KMT politician would seriously think about unification," says Ho Szu-yin, a political scientist at National Chengchi University who also works for the KMT.
The main difference between the KMT and the DPP could be described as one between realism and idealism. The DPP, a party founded in opposition to the KMT's authoritarian one-party regime in the 1980s, openly advocates Taiwanese independence. The KMT in the past tried to impose a Chinese nationalist ideology on Taiwan and cling to its goal of eventual unification but it has moved to the middle since democratisation for the sake of political survival. "We also love Taiwan, but we love it in a realistic way. We take the view that if we don't have wealth we don't have power," says Mr Ho. "Economic clout is Taiwan's raison d'etre."
That certainly differs from China's long-term objectives. "The Chinese leadership hopes to create an irreversible trend towards peaceful integration," says George Tsai, a professor at Chinese Culture University and one of Taiwan's leading experts on cross-Strait relations. But he believes that China's leaders are happy for now, having been reassured by Mr Ma that formal independence will not be an issue under his government.
Therefore the new start between Beijing and Taipei could be about much more than business, even though it does not put Taiwan on the road towards unification.
Mr Tsai says that by the end of Mr Ma's first term, China and Taiwan could have implemented confidence-building measures such as the exchange of information on weapons deployments and troop movements and the establishment of communication channels between the armed forces to reduce the risk of conflict: "That would be a good start for another four years and far beyond anything that has been achieved ever since 1949."
Labels: Taiwan
¶ 7:43 PM
