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China investment hurts economy

There have been reports of an uninterrupted foreign capital inflow into the Taiwanese market over the last 29 days (as of Dec. 15). Foreign investors contributed NT$220.4 billion (US$6.5 billion) during this period, and a total of NT$520.3 billion (US$15.3 billion) for this year. These are record figures. As a result, the nation's stock market bounced back with a gain of 700 points and briefly stood at 6,200 points.

According to statistics, Taiwan's stock market has attracted the largest capital inflow in Asia this year. As of Nov. 11, the amount totalled US$13.9 billion. In contrast, South Korea experienced foreign capital outflow of more than US$1.45 billion. Why would foreign investors abandon South Korea and other Asian markets for Taiwan? The explanation is that foreign investors overestimated Taiwan's economic performance last year and invested a total of US$8.67 billion in the local stock market. As a result, Taiwan's capital inflow was ranked third in Asia after Japan and South Korea last year. But, Taiwan's economic picture was not as rosy as predicted because of excessive investment in China by Taiwanese businesspeople. As a result, whereas South Korea saw a stock market rise of 27.5 percent and Singapore recorded a 21.64 percent increase, Taiwan's stock market grew by only 4.23 percent. This year, Taiwan's economic performance has been even worse, and as of the end of September, the stock market had fallen by about 3.48 percent.

What should we do about the continued lackluster performance of the nation's stock market, which has been in sharp contrast to the strong performance of those in other countries? The only solution for foreign investors is to seek lasting recovery by balancing accounts. This was where the so-called "November gamble" came from. As of right now, Taiwan's stock market has been positive, but whether or not the balancing of accounts will work depends on foreign investors' stock choices.

Which stocks do foreign investors favor? Between Oct. 31 and Dec. 7, capital inflow was primarily concentrated in concept stocks of Taiwanese firms that are based in Taiwan and uphold the concepts of "go slow, be patient" and "effective management." These companies have not invested much of their capital in China. In other words, their operational concepts are similar to South Korea's Samsung and Japan's Toyota, whose primary production headquarters are based in their countries of origin. (Note: SinoPac Holdings (建華金) and Mega Holdings (兆豐金) have not invested in China at all because of the above-mentioned Taiwan-based concept.)

Why don't foreign investors buy Taiwanese stocks that are strong in China's stock market, such as Uni-President (統一), Taiwan Glass (台玻), Namchow (南橋), and Sampo (聲寶)? These firms took the "opportunity" to pioneer investing in China. They incorporate their "resources in China" and advocate the theory of the two ends of the "smile curve." In theory, they should have the ability to make profits and be excellent businesses with high operational performance. So, why aren't they attractive to foreign investors? The reason is simple: excessive ambitions to invest in China only serve to distract a company from its business operations since management are obliged to frequently fly back and forth between the two sides of the Taiwan Strait. Thus their minds are not on transformation and upgrading, which are important business operational features. As a result, the two ends of the "smile curve" -- manufacture and sales -- are left unsupported and the whole thing collapses.

Facts speak louder than words. No matter how the pro-China media try to praise China-based Taiwanese businesses, the real contributers to Taiwan's economy and its stock market are those Taiwanese businesses whose "main production lines" are based in Taiwan. It is only because of these Taiwan-oriented businesses that Taiwan's stock market still exists and remains a target for international investors.

Recently, the pro-unification media published a feature report of the top 1,000 China-based Taiwanese businesspeople, and gave these people a great boost. Given the large scale of these China-based Taiwanese businesses, we see that they have successfully made a lot of money. But, if you take a closer look at the top 50 Taiwanese firms in China, about 80 percent of them never repatriate their money. This is to say that these China-based firms do not contribute to Taiwan's stock market.

Of course, we should not nit-pick about how much money these companies repatriate. After all, it is human nature to invest in the place where you first made your money. Nevertheless, the facts show that the notions of "go slow, be patient" and "effective management" are the core strengths supporting Taiwan and its economy. If the government takes the advice of businesspeople and abandons these core strengths for transient political benefits (as it may be tempted to do in light of its major setback in the recent local elections) by permitting Taiwan's wafer foundry, sensor, flat panel and banking sectors to relocate to China, this will be the beginning of the end for the Taiwanese people.

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

TRANSLATED BY LIN YA-TI
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