Taiwan's capital controls backfire

The Ministry of Finance (財政部), the Mainland Affairs Council (MAC, 陸委會) and the central bank (中央銀行) have been working on a control mechanism to prevent massive capital outflows to China and to repatriate business earnings. Despite the government's good intentions, however, the "no haste, be patient" (戒急用忍) policy and the capital control mechanism will not solve the problems and may even backfire.

First of all, in the era of globalization, it is impossible for Taiwan to control capital flow unless it is willing to cut all transnational capital flow and trading. In the development of cross-strait trading in recent years, Taiwanese investments in China have always run ahead of government regulations. Eventually the government was forced to face reality and change its policies.

For example, in 1997, the government requested businessmen register all their previously unregistered investments in China. Previously unregistered investments totaled US$4.7 billion, an amount equal to 73 percent of the accumulated value of the investments that were officially registered at the time of the government's request.

Since the no haste, be patient policy was first advocated in 1996, some large companies have found it more difficult to invest in China, but their enthusiasm for going westward cannot be allayed. Furthermore, they have turned investments in China into an underground business. By the end of last year, the registered volume of Taiwanese capital invested in China was only US$17.1 billion, while Chinese statistics showed the figure to be US$25.6 billion. But the central bank estimate was as high as US$50 billion, almost triple the official figure.

In fact, due to the no haste, be patient policy, many businessmen are unwilling to register their investments with the Ministry of Economic Affairs (MOEA, 經濟部). Some remit money to holding companies registered in countries which provide preferential tariffs before investing in China.

In 1995, Taiwanese investment in British territories in the Caribbean only accounted for 15 percent of total Taiwanese investments in foreign countries that year. But in the first half of last year, the figure rose to 31 per-cent, making those territories the second biggest investment location for Taiwan -- second only to the 37 percent in China.

At the beginning of this year, Grand Pacific Petrochemical Co (國僑) and Macronix International Co (旺宏) separately invested US$82 million and US$75 million in holding companies in the Virgin Islands, while Yageo Corp (國巨) invested US$250 million in the Bermudas.

Actually, a large amount of the above Taiwanese capital flowed to China. In 1995, the Virgin Islands' investment in China only amounted to 0.8 percent of its total direct investment that year, but the figure rose to 9.7 percent by the first half of last year. The Virgin Islands surpassed the US and Japan to become the second largest source of foreign capital for China, second only to Hong Kong.

It is futile for the government to try to use the no haste, be patient policy to control investment in China. The policy has even become the main reason for businessmen to refuse to remit their profits back to Taiwan. According to a survey conducted by the Chinese National Federation of Industries (全國工業總會) at the end of last year, about 55 percent of investors in China turned a profit in 1999 and 2000, and the figure is expected to rise to more than 70 percent this year. In addition, the survey showed that less than 20 percent of investors in China were running at a loss in 1999 and 2000, and the figure is predicted to drop to only 8.6 percent this year. Most Taiwanese businessmen are therefore reaping profits across the Strait, but refuse to repatriate their money. This is the root of the problem.