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Editorial: Investing in a minefield

Last Wednesday, after Chinese Premier Wen Jiabao (溫家寶) proposed to cool China's breakneck economic growth, Taiwan's stock market plunged 10 percent in three days. The NT dollar also continued to lose ground. But his announcement came as no surprise.

The possibility of China losing control of its overheated economy has posed a long-standing problem for officials. Economists around the globe have their eyes glued on China. The pegging of the Chinese yuan to the US dollar has kept the yuan quite strong, other governments are pressing China to revalue its own currencies. The strength of the yuan has also increased the flow of hot money into the Chinese market and has invited creeping inflation. Although a appreciated yuan had been expected, Wen's announcement that China's feverish economy would be calmed to some degree still managed to trouble stock markets across Asia.

Taiwan must pay close attention to China's economic situation. With the nation's exports to China exceeding 36 percent of total exports, China has overtaken the US as the nation's biggest trading partner. Therefore, the maintenance of a smooth trade relationship across the Taiwan Strait is becoming yet more critical in safeguarding national economic development.

Unlike the "trade over investment" approach to the Chinese market adopted by many other countries, Taiwan has been dumping valuable investment resources rather than engaging in trade with China. "China fever" has accelerated not only Taiwan's capital hemorrhage but also the outflow of talent and technology. Many Taiwanese businesspeople, after investing in and setting up factories in China, return to compete with domestic companies, thus weakening Taiwan's long-term competitiveness.

Indispensable as they are for cooling down an overheating economy, Wen's measures highlight the fact that China's economy is still curbed by an authoritarian government. In the face of economic fluctuation, governments of most capitalist economies let the market determine interest and exchange rates, and hence currency supply and demand. It is uncommon for a government to intervene too closely in economic activity, except when drastic changes occur in the market.

Ignoring market forces, Beijing is attempting to rein in its economy by executive order, putting a halt to major construction and investment projects both nationally and locally. Such strong-arm tactics may illustrate the Chinese government's determination, yet it totally disregards the market, thereby wreaking havoc on the interests of local and foreign investors. It is the non-economic risks of investing in China that most suffering foreign investors have neglected.

Beijing's measures hope to cause only short-term harm -- but with it long-term benefit. No one, however, can be sure that similar measures will not be adopted in future to tighten the economy, nor can one predict the scope, duration or impact of any other measures on industry.

There is one thing of which we can be sure: Beijing's heavy-handed policy has on this occasion served as valuable shock therapy for China-based Taiwanese businesspeople and foreign investors. Investing in China is not as profitable as it appears after all. The capitalist's gold mine is actually a minefield of concealed dangers of every variety -- and the economy is merely one of them.
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