Tue, Jul 08, 2003 - Page 8 News List

Editorial: Beware China's financial talons

Taiwan has always viewed foreign capital with both trepidation and expectation. In his speech at a seminar on financial reform yesterday, President Chen Shui-bian (陳水扁) said the government plans to ease the limits on foreign investment in the country's stock market soon. This demonstrates the government's new thinking on foreign investment -- a view in which economic development overrides the emphasis on financial security that has prevailed since the 1997 Asian financial crisis.

Taiwan has scored considerable achievements in financial liberalization and internationalization, but there are also blind spots. In concrete terms, Taiwan is under pressure from economic erosion and military annexation by China. Taiwan inevitably has to put more thought into national security in the process of financial liberalization and internationalization so as to prevent a repeat of Hong Kong's situation in the run up to the 1997 handover, in which a massive influx of Chinese capital caused the territory to lose its economic independence. Worries about China have caused the pace of Taiwan's liberalization to falter.

The experience of the Asian financial crisis is another reason why Taiwan's financial authorities have been wary about easing restrictions. Taiwan came out relatively unscathed from the crisis but the government is still fearful of the aggressive profit-taking acts by international financial opportunists in the currency markets, which have caused the Asian financial crisis to spread further afield.

"It should have been done a long time ago" was KMT Chairman Lien Chan's (連戰) response to Chen's announcement of the new policy. However, this particular policy was long debated in the days of KMT rule and no consensus was reached. Since the DPP came to power, both the Central Bank and the Securities and Futures Commission have held the view that this policy faces enormous obstacles and is hard to implement. During its internal meetings, the Central Bank repeatedly stressed the "importance of maintaining stable currency exchange rates," and held the view that recklessly lifting the restrictions before cross-strait relations see any tangible improvement will open the doors for Chinese capital to come in and jeopardize Taiwan's financial order. It would also lead to foreign "hot money" such as hedge funds to disturb the country's currency markets.

Fluctuations in the NT dollar and the infiltration of Chinese capital are still the key issues in the government's financial liberalization policy. Objectively, Taiwan's environment has not improved substantially. In contrast to his cautious attitude on direct links with China, Chen's decision to ease restrictions on foreign capital is an indication that improving the economy is the top political mission. Taiwan's investment environment is still better than that of many other countries. For foreign investors Taiwan is still a worthwhile investment destination. Taiwan also needs foreign capital to fill in the gap created by the capital outflow to China and to boost the country's economic vitality.

This shift in policy emphasis from economic security to economic development is more symbolic than substantial, but the government should not underestimate the negative effects of Chinese capital infiltration and currency market fluctuations. Even though the government has said the liberalization will be complemented with a capital reporting system, this will only prevent blatant Chinese capital invasion. It will not eliminate indirect interference by Chinese capital. The financial authorities should plan more reliable safety valves to maintain Taiwan's security in the process of financial liberalization.

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