Taiwan has pledged to fully liberalize foreign investment in the stock market by the year 2001, assuming that Taiwan gains entry into the WTO in the year 2000.
But even though Taiwan is still waiting for entry into the WTO, the Ministry of Finance has already gone ahead and lifted the investment limit on qualified foreign investment institutions (QFII) from US$600 million to US$1.2 billion, according to reports.
It is estimated that this move will bring another US$22 billion in foreign investment to Taiwan, and the announcement boosted the TAIEX two days in a row.
The government should quickly establish a system of regulations for foreign investment and slow down the movement of short-term capital flows into and out of Taiwan, thus preventing another outbreak of a financial crisis.
Instead, the ministry has relentlessly pursued financial liberalization and increased Taiwan's exposure to international capital flows.
This may unleash uncontrollable forces into Taiwan's economic fundamentals and financial sector.
Taiwan's balance of payments for the third quarter of this year looks impressive, but it is also disconcerting.
Taiwan's large capital account surplus overtook the current account surplus in the third quarter.
The surplus in the capital account reached US$2.732 billion, three times greater than the current account surplus for the same period of US$3.4 billion. Looking more carefully at the breakdown of foreign capital flows into Taiwan, the capital account surplus for the first three quarters of this year hit US$7.8 billion, which is more than twice the current account surplus for the same period.
Moreover, Taiwan registered a negative US$1.012 billion in direct investment for the first three quarters of this year. In other words, Taiwan's favorable balance of payments at the present stage depends a great deal on surpluses in the capital account.
The Ministry of Finance continues to state that its goal is to attract long-term direct investments to Taiwan, and keep out speculative capital.
But the figures speak for themselves, and speculative capital flows make up the lion's share of Taiwan's most recent balance of payments surplus, exactly the opposite of what the ministry hoped.
If foreign short-term capital holders decide in the future to dump assets in Taiwan, it could lead to an immediate balance of payment crisis.
Even Taiwan's "National Stabilization Fund" would be helpless against such a massive capital flight.
Perhaps more worrying is the fact that the Ministry of Finance does not seem to be concerned about sudden short-term foreign capital outflows.
The ministry seems unwilling to examine the possible impact of foreign capital outflows on Taiwan. What it has done is to sacrifice, under political pressure, its independent status as the institution that should regulate Taiwan's financial system.
Foreign investment should be liberalized, but if the net surplus of short-term financial flows exceeds trade surpluses, it will not benefit actual production in Taiwan in the least, and may bring about yet another financial crisis.
Taiwan is eager to make generous concessions to get into the WTO, but this may endanger Taiwan's financial stability.
The government should reconsider the level of financial liberalization in Taiwan and re-examine the strength of foreign capital before it makes more promises to deregulate its capital controls.
Hung Chi-chang is a DPP legislator.
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