Last Thursday, the Financial Supervisory Commission (FSC) announced the figures for the number of domestic publicly listed companies and over-the-counter (OTC) companies investing in China, and for companies investing in foreign countries other than China, for the period ending in the third quarter of this year. In the report, which also included the total amount invested in these destinations as well as the amount of currency repatriated, the FSC pointed out that when the amount of money repatriated from China is compared to the return on investments in other countries, the money repatriated from investments in China by domestically listed companies was not so bad.
Is this really the case? Or is the FSC guilty here of fudging the statistics, as we suspect they are? Taiwanese publicly-listed and OTC companies have invested more than NT$400 billion (US$12 billion) in China, but in the last decade or so only NT$38.7 billion has been repatriated to Taiwan -- a figure that represents less than 2 percent on average per year.
According to FSC statistics, Taiwanese investors ploughed NT$486.1 billion into China last year, but during the first three quarters of this year only NT$8.3 billion had returned to Taiwan. This represents a mere 1.7 percent of the original amount invested -- an annual return of 2.2 percent. The FSC has made up its own figure, which it calls the "repatriation rate of money invested in China." To get this figure it took the amount repatriated to date, NT$38.7 billion, and divided it by the amount leaving the country, NT$486.1 billion, to come up with 7.97 percent -- intentionally neglecting to include the accumulated capital of the last decade or so. This is truly a stroke of genius.
Not long ago, the FSC had the audacity to blame Taiwanese banks for maintaining overly low rates of return on equity (ROE) and return on assets (ROA), saying that with an average of 6.05 percent in 2000 and 8 percent last year, they have fallen short of the international norm for the past five years. Strangely enough, however, they can still say that the 2.2 percent rate of return from investments in China, which in the long-term view can be equated with ROE, is "not so bad!" It does appear that double standards are being employed by the FSC.
Recently, it also announced that it is to use ROE and ROA as competitiveness benchmarks, saying that it will close branches that fall short of the standards set. Of course banks should be supervised. But it is very difficult to understand why they don't want to pull the plug on investments in China despite ludicrously low returns and repatriation rates, but at the same time want forceful deregulation.
The FSC has set up a lot of regulations and restrictions concerning how Taiwanese banks can use their assets: A bank can only give credit to a business up to a certain percentage of the bank's net worth, namely 5 percent for unsecured loans and 15 percent for secured loans; commercial banks cannot invest more than 40 percent of their paid-up capital; and banks must conduct national risk management assessments for each individual country.
The weird thing is, the FSC is one of the main proponents of the government increasing the 40 percent ceiling on investing in China. Capital for listed companies comes from the public in the same way as it does for banks, so isn't it contradictory to prevent a bank from investing more than 40 percent of its net worth while at the same time saying that the 40 percent investment restriction for businesses should be relaxed, or even abolished completely?
Is the 40 percent limit on investing in other countries really so draconian? This figure is already eight times higher than the restriction prohibiting banks from lending more than the equivalent of 5 percent of their net worth to any company. From the perspective of safe management, a business placing 40 percent of its capital investment in a country would, if we also add working capital to that amount, be completely at the mercy of the country in which it is investing. It really is difficult to see eye-to-eye with the FSC in this case, given the double standards it is employing.
If you add the amount Taiwanese businesses are investing in China to the investments they are making in other foreign countries, the total would be US$280 billion, something like 90 percent of the nation's GDP. The FSC is naturally well aware of this fact. To have such a high concentration of investment in a hostile nation is, without doubt, contrary to the whole idea of financial regulation that the FSC should embody.
If we accept that banks must go to the same countries where businesses invest, we would advise the FSC to require these companies to spread their investments over several countries. It would then follow as a matter of course that Taiwanese banks could diversify national risk.
Huang Tien-lin is national policy adviser to the president.
Translated by Paul Cooper
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