Foreign investors appear muddled

`Taiwan is not Hong Kong, nor is it Singapore, and it is not true that things will become better the more we deregulate.'

Taiwan's stock market remains weak and it seems impossible to reinvigorate it. This has resulted in severe losses for individual investors over the past few years. The same seems to hold true for foreign investors. The situation in other Asian countries is, however, very different.

For example, Singapore's stock index grew by 21.64 percent last year, South Korea's by 27.25 percent, the Philippines' by 25.06 percent and Japan's by 14.98 percent, while Taiwan's stock index only grew by 4.23 percent. This means that most individual investors in Taiwanese shares would have taken a loss last year. So far this year the South Korean stock market has outperformed others in the region with a growth of 20.9 percent. Japan's stock market index has grown by 10.5 percent, the Philippines' by 6.2 percent, Thailand's by 4 percent and India's by 18.2 percent. Taiwan's stock market index has fallen by 1.7 percent, which means even more people lost money compared to last year.

The odd thing is that foreign investors have bought Taiwanese shares worth US$10.92 billion (approximately NT$350 billion) this year, making Taiwan second only to Japan as a target for foreign investors in Asia. Foreign investors have only invested US$840 million in South Korean shares so far this year.

Beginning early this year, foreign investors have taken a positive view of Taiwan's stock market. The asset management company JP Morgan even predicted that the stock market index might break through 10,000 points. But reality and expectations run counter to each other. Because the New Taiwan dollar once again has fallen to NT$32.75 to the US dollar, the foreign investors who invested a total of NT$630 billion this year and last are now caught in the awkward situation of losing money on both the stock and forex markets.

This begs the question why foreign investors who see themselves as clever investors are losing money in Taiwan.

First, as they have always told the government, the more Taiwan deregulates, the better the economy will do. As a result, Taiwan today has the freest economy in Asia -- Singapore and Hong Kong excluded -- and it is far freer than South Korea or Japan. But the more Taiwan deregulates, the less power it has to resist China's attraction. This is intensifying the problem with Taiwanese capital flowing out of the country and causes the stock market's lackluster performance.

Second, they always use a Western approach when analyzing the economic relationship between Taiwan and China in the belief that investing in China will help develop Taiwan's economy. Their analyses are only concerned with immediate individual economic benefits and completely fail to understand that Taiwan's annual investments in China on average make up 4 percent of Taiwan's GDP. This is 130 times more than the US' 0.03 percent of GDP, and about 20 times more than South Korean investments in China.

In the long run, this makes for an extremely bearish outlook on the local stock market, but that is unfortunately not something that foreign investors have discovered.

Third, they always see direct links, charter flights, harmonious co-existence and other things that may promote cross-strait exchanges as beneficial to Taiwan. As a result, all the bad news that ought to spell a bearish future for Taiwan's economy are interpreted as bullish news. This completely ignores the huge size difference between Taiwan and China.

When joining together a small and a large economic body, it is unavoidable that people and capital from the smaller body will flow toward the economic hub in the larger body. This is not good for the development of Taiwan's economy or its stock market.

Misunderstandings create bad investment decisions, and this is why we have seen predictions that Taiwan's market will break through the 10,000-mark and that the New Taiwan dollar will once again go below NT$30 to the greenback.

Experience tells us that the "no haste, be patient" policy had a bullish influence on Taiwan's stock market. In August 1997, the market index reached 10,156 points, a result of the implementation of the policy one year before. In the late 1990s, investments in Taiwan Semiconductor Manufacturing Co, United Microelectronics Corp and other technology stocks brought quite good returns on investment as a result of that same policy.

Experience is knowledge, and I hope that foreign investors will be able to take the latest painful lesson to heart. Taiwan is not Hong Kong, nor is it Singapore, and it is not true that things will become better the more we deregulate. They should try to gain a better understanding of Taiwan. They should realize that Taiwan already has invested too much in China and that Beijing has ambitions towards Taiwan. They should stop urging the government to further open the doors to China.

If we could all return to the concept of using business to pressure the government into improving its policy of effective management toward China, Taiwan's stock market would be certain to return to the glory days of the 1980s. This would give foreign investors the chance to reap the benefits of the combined US$87 billion that they have invested in local securities.

Huang Tien-lin is a national policy adviser to the president.

Translated by Perry Svensson