Investment in China is causing stock woes

Leaders of the business community recently attended a banquet hosted by the Formosa Plastics Group (台塑集團). During the banquet, President of Formosa Plastics Wang Yung-ching (王永慶) expressed concerns that stocks of high-technology industries were becoming so-called "egg and dumpling shares" (ie, each share has a market price that is less than the price of an egg or dumpling). Wang's words are right on the money. Many of Taiwan's high-technology stocks seem to be suffering the same fate as stocks in traditional industries. However, Wang seems to have ignored the reasons why stocks in traditional industries have turned from being a very hot market item into yesterday's news within just a few years.

Traditional industries began a feverish rush to invest and establish factories in China around 1992. Despite concerns about this, advocates of the "go-west" theory said "research and development, capital and design will remain in Taiwan," and that "with China in Taiwan's downstream, the resulting division of labor creates a win-win situation for both sides." The government caved in and adopted a policy that neither prohibited nor encouraged the trend.

What happened next? Within a few years, Taiwan's traditional industries were uprooted completely. The industrial parks in central and southern Taiwan have been left in a deserted and ruinous state. The decline of traditional industries created a domino effect on related industries. The depressed real estate market has in turn caused the amount of outstanding bank loans to skyrocket. Why? Because our businesses have invested way too much in China.

Between 1991 and 1996, in terms of investment in China, Taiwan businesses far surpassed major economic powers such as the US and Japan. Translated into GNP, investment by Taiwan was 49 times that of the Japan, and 80 times that of the US. Taiwan's investments are excessive. The door was left wide open. These are the roots of today's banking crisis.

The wounds from this lesson are still fresh. Yet, we are repeating the mistake. In the past two years, the "no haste, be patient" policy has been left out in the cold. The Ministry of Economic Affairs keeps its eyes shut as high-technology industries relocate production bases to China, and build complete vertical production lines. Whenever Taiwan businesses manufacture a product in China, their counterparts in Taiwan face a crisis. As the former enjoys the benefit of cheap labor, the latter begins to lose orders and profits. Sooner or later, the latter has to relocate to China as well. It is either that or shut down. This is a major reason for the decline in the stock prices of high-technology companies.

Wang worries about a financial crisis in Taiwan. His concern is truly touching, while his views about the "no haste, be patient" policy seem sincere as well. Perhaps in the past, implementation of the policy was flawed, meaning necessary restrictions were not put in place, and businesses that should have remained in Taiwan were allowed to relocate to China. On the other hand, too many restrictions were imposed on businesses that had already made significant contributions to Taiwan industries or that should rightfully relocate to China. However, it is also a plain fact that the cause of Taiwan's partial financial crisis is the excessive flow of capital to China. If we further relax restrictions on China investments now, so that the high-technology industries may follow in the footsteps of the traditional industries, the result may be a comprehensive financial crisis. How to deal with the situation is an issue which government and industries must discuss. While the government has much to work on, businesses should also do better.