Taipei Times: Hong Kong residents demonstrated "people power" in opposition to the passage of the so-called anti-subversion law, Article 23. How do you think that political rally will impact Hong Kong's economic future?
Chan Tze-ching (陳子政): Prior to the half-million demonstration, people outside Hong Kong thought that all the territory cared about was money and creating wealth. But this incident clearly proved them wrong and [showed that] Hong Kong people do have a political sense.
The target was to demonstrate against Article 23, which was seen as a potential threat to freedom of speech and expression as well as freedom of criticizing [political] leaders. Politics and economics are always intertwined. If you look at the global investment patterns nowadays, the markets that tend to attract the most inflows of foreign investments are those that are seen as politically stable, ruled by transparent laws and open to both local and foreign participants. If this event turns out to become a pat-tern, I would say it is pretty worrisome in Hong Kong.
PHOTO: GEORGE TSORNG. TAIPEI TIMES
It's a shame that Hong Kong people had to go through these in order to get what they ask for. But having more of these large-scale protests will not help Hong Kong's image as a financial center.
TT: Will Hong Kong's economy benefit from its inking late last month of the Closer Economic Partnership Agreement (CEPA) with China?
Chan: The CEPA will definitely help Hong Kong, though maybe not substantially in the near term. Under the CEPA deal, over 270 commodities can be exported to China from Hong Kong without customs duties, but the question is how Hong Kong can coordinate the other resources such as labor, land, water and electricity in order to make itself a viable manufacturing hub for those products qualified under the CEPA. The agreement is a way to reverse or slow down the capital outflow from Hong Kong to China. By doing that, Hong Kong can create more jobs, which currently is a big issue since the unemployment rate has reached a record high of 8.3 percent and may go higher in the remaining months of the year.
If this is done right, the benefits will be evident in one to three years. There won't be immediate benefits because Hong Kong is simply not geared up at this particular moment to take full advantage of the agreement.
TT: Do you see the trend of growing cross-strait trade helping to revive Taiwan's economy or simply crash it?
Chan: Cross-strait investments and trade flows are not a temporary fact. They are an irreversible trend that will continue to grow stronger. The question is how we can facilitate the process and also make sure both Taiwan's and China's economies benefit in the process. It's not easy to do because, in a way, China's gains have been Taiwan's losses and also Hong Kong's.
Take Hong Kong for example. Over the last 20-odd years, the manufacturing base has moved from Hong Kong to southern China, resulting in a big job loss at home. Fortunately, at the same time, the service industries provided a lot of new employment. Through the mid-1990s, this phenomenon was beneficial to both Hong Kong and China because China created a lot of wealth while Hong Kong moved up the economic ladder and became a more service-oriented economy with high-end jobs in the financial, property and logistics sector.
Up to 1997, the further integration between Hong Kong and China resulted in a much bigger challenge than Hong Kong could handle, resulting in recession, deflation and loss of jobs. It is an example that, if we do not handle integration carefully, it could well result in the win by one side becoming the loss by the other side.
Taiwan is much better positioned to take advantage of the further integration with China because it has a strong industrial base. Taiwan still retains the high-end manufacturing [sector] and research and development (R&D) while moving the low-end part to China. Taiwanese businessmen should learn to identify niches to help them take full advantage of China's manufacturing base and markets.
TT: What is Citibank's plan to meet the financial needs of China-based Taiwanese businesspeople? What are the financing difficulties in China?
Chan: Citibank has a strong presence in Taiwan and branches in four major Chinese cities, where Taiwanese businessmen have made the most investments. Many busi-nesses retain their decision-making headquarters in Taiwan. What Citibank does is to maintain a strong relationship with decision-makers in the corporate headquarters here, but at the same time, build up a strong execution capability in places where the money is needed.
There are many ways to raise capital. The most preferred one is for companies to raise capital here and use the capital to invest in China, because the regulations in China are still not transparent and the depth of Chinese markets are very different from Taiwan and Hong Kong. Eventually, I expect more financing can be done in China, rather than in Taiwan or Hong Kong.
Under such circumstances, our execution capability in China and global platform will be critical and that's why we have to coordinate ourselves as an institution as to how we build up a sound relationship with decision-makers in Asia and our execution in China where all business activities take place.
But China has to open up to create more room for foreign institutions to offer their financial products and services while building up financial infrastructure such as an efficient inter-bank market where funds can be exchanged. More importantly, China also has to make its currency more tradable, more transferable and more convertible.
TT: Washington has been stepping up its pressure on Beijing on yuan appreciation. Will China adopt more flexible currency policies?
Chan: In my opinion, the more pressure that foreigners exert on China, the less likely it will be for China to change its currency policies. We have to understand the psychology of China, which has suffered from exploitation. China's psychology simply won't allow it to yield to foreign demands. Having adopting a wrong strategy, the more the US and the EU talked about the issue, the less they will get what they ask.
TT: To compete for foreign investments, both Taiwan and China recently relaxed restrictions on qualified foreign institutional investors (QFII). How competitive do you think Taiwan is?
Chan: To be honest, I think China retains insurmountable advantages in terms of attracting foreign direct investments (FDI).
It will be very hard for any country to compete with China, which still has an untapped market and immense resources waiting to be unlocked including labor and talent. Don't underestimate the extent to which China can provide brainpower in the next 10 years, just like India in the software industry. Statistics would show you that China has been gaining FDIs at the expense of Asian countries. But I am not too worried about Taiwan, which remains an attractive market.
What I just said about China hasn't become a reality yet except it provides low-cost production for exports to the US and Europe. As a market, no foreign investors have made significant profits in China, not even Citibank. But comparing Taiwan and China, take our franchise for example, Taiwan is still many times bigger. Why would I forsake this market, Hong Kong, which is our No. 1 market in the region, for something that could be years down the road?
In the near term, Taiwan is clearly attractive given the vibrancy of the stock and bond markets. The advantages of Taiwan lie in its industrial base, entrepreneurial experience and technology.
Moreover, Taiwan has found its niches in global markets. Since many Taiwanese businesses have also branched out to China, what Taiwan can do is to attract profits made elsewhere to finance and reinforce its R&D capabilities.
TT: As the biggest foreign bank in Taiwan, how do
es Citibank assess the impact of the legislature's recent failure to expand the Financial Restructuring Fund (金融重建基金), which was designed to help bail out distressed banks, on the local banking sector's health?
Chan: Taiwan has done a lot to clean up non-performing loans in the past years, but the job is not complete. However, there's a clear intention on the part of the government and all parties involved to proceed the reform. The problem is recognized, the intention is there and the resources also are there. The only hurdle is the delay of the allocation of the fund, which, to me, is an easier problem to deal with. One way or the other, the political impasse will get resolved.
I'm not too worried because there is no evidence that Taiwan has mismanaged the process. But if the problem is not solved, it could cause all kind of misalignment such as deflation and a credit crunch.
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