Thu, Jul 29, 2004 - Page 8 News List

Editorial: Go slow on cross-strait investment

According to the confidence index released by China's Economic Observation Research Institute, 1,200 listed companies in China failed a confidence evaluation survey among their investors. The average survey score was only 35.6 out of 100 and the highest score was just 51.

This indicates that Chinese investors have very little confidence in listed companies in China. This announcement, together with several recently uncovered financial scandals, suggests a serious internal crisis in the Chinese economy. Such information also serves as a lesson for many Taiwanese who advocate investing in China and encourage China-based Taiwanese companies to be listed here.

The survey results are not unexpected. It's simple logic that economics can never be separated from politics, and that economic transparency correlates directly to the degree of political transparency. Can we expect companies in China, where dictatorship and lack of openness in political decision-making are the norm, to offer transparent information?

Taiwan's transparency of information has been recognized by foreign investment funds. Morgan Stanley Capital International announced last month that it would increase the weighting of its Taiwan Index from 55 to 75 percent by the end of this year and to 100 percent by next May. This suggests that the nation already stands as a mature capital market in the eyes of foreign investors.

But even so, corporate scandals still hit the headlines. For example, the fraud uncovered last month at Procomp Informatics Ltd (博達科技) has led to tremendous losses for its investors. How much more likely is an incident like this in China, with its authoritarian political environment and financial markets that are still in their infancy? We can see from reports on China Central Television that there are numerous companies that sell fake products with a total disregard for people's lives. Consumers are afraid of purchasing products that may cause cancer; investors are afraid of putting their money into a company on the basis of false information.

It is said that "when the water is too clear there are no fish," but in a chaotic investment environment, investors must remain alert at all times. Information on China's companies is often false and the risks that this leads to should not only warn us to be cautious when investing in or trading with Chinese companies, but also should warn us not to blindly allow Taiwanese firms based in China to list on the stock exchange here. The logic of this is simple.

Take Procomp. Every company that goes public is required to accept supervision and scrutiny from Taiwan's financial authorities. Even here there are legal loopholes, so we need hardly mention what the situation will be like for Taiwanese companies that have invested in China.

There are no legal or financial audit mechanisms operating across the Taiwan Strait so there is no possibility of the nation's financial authorities crossing over to audit such companies. If these companies were listed here, the only way to ascertain the veracity of the information contained in their financial statements would be by divination. Investors buying such stocks could only close their eyes and hope for the best.

The question is, can the government allow investors to take such risks? The answer is no. It is not that Taiwanese companies based in China aren't believable, but simply that the legal and financial structures in China cannot gain investor confidence. It is impossible for Taiwan's financial authorities to audit these companies, so we recommend that the government proceed slowly in this matter. Priority should be given to pushing forward President Chen Shui-bian's (陳水扁) financial reforms and consolidating the nation's capital markets. Only after we become a more mature and highly developed market should we proceed further.

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