The Economist managed to stir up a hornets' nest this weekend with a report that, if you were to believe the Chinese-language media, predicted Taiwan's economic collapse in January next year. Of course the magazine said nothing of the sort. What it did say was that Taiwan's banks are in bad shape, indeed far worse shape that the government is prepared to let on, and that the period immediately before Chinese New Year -- which falls next year in the last week of January -- the traditional period for settling debts, the island might see some sort of a liquidity crisis.
What surprises most about The Economist's story is that it surprises at all. That the banking system is groaning under a mountain of bad debt can surely not be breaking news to anybody; this newspaper, for example, has run an astonishing -- even to us -- 128 stories so far this year about overdue or non-performing loans, that's about three stories a week. We even ran two stories on the topic on Saturday.
Far more disturbing than any revelations The Economist might have to offer however is the way the story has been treated in the Chinese-language media. Almost without exception the article -- which few Taiwanese are likely to read in the original -- has been distorted to reflect as badly as possible on the present government. The impression is given that the impending financial crisis, if there is such a thing, is just another consequence of the new government's lackluster performance, exemplified by the bearish stock market in recent months and the current political chaos surrounding the possible recall of the president.
This is a complete distortion. True, the magazine says that "Taiwanese politics bear much of the blame for the mess." But it is not the politics of the DPP administration being referred to here. Rather it is in the crony capitalism of the KMT, different in nature from that of Indonesia's Suharto family only in regard, perhaps, to the numbers who have benefitted. Loans were made to friends and cronies, often on very favorable terms, backed by weak collateral. Given the conjunction of the island's business elite and the KMT central committee, the financial sector regulators' job prospects were hostage to the favor of the very people they were supposed to be overseeing. Where the gamekeepers are employed by the poachers, one does not expect to find a well-run estate.
The problems in Taiwan's financial sector have been long in gestation and were certainly compounded by the KMT's pressure on banks to roll over bad loans. If Taiwan is sitting on a financial time bomb it is the KMT which positioned it there and started the timer. The article makes clear that the current government has taken several much-needed steps to allow the liquidation of bad loans.
But enough of whether The Economist is being reported accurately. Surely we should be more interested in the veracity of its conclusions. Is Taiwan facing a banking sector crisis? After all, bad debt is piled up to levels similar to Korea in 1997. To which our answer is that systemic collapse is almost certainly not going to happen. Currently the government wants good banks to pick up the tab for the bad ones, something which will save it money but might spread the rot. But it has enough in its coffers to bail out the banking system, reluctant though it might be to use its funds for such a purpose. The real worry is that, reluctant to clean up the KMT's mess, the government, like Japan through the 1990s, will do nothing and lack of liquidity will eventually start to stifle growth. It is not liquidity next January we should really be worried about then, but rather growth five years hence.
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