The folly of putting all eggs in the one basket

President Chen Shui-bian's (陳水扁) policy of "active management, effective opening" has been criticized by the opposition, but it is a positive step.

First, China's economy is dominated by state-owned enterprises, and its foreign trade and foreign exchange markets remain under strict government control.

Also, given that there is a wide disparity in terms of population and amount of territory between Taiwan and China, if cheap goods from China's state-owned factories are allowed to flood Taiwan, this will cause great damage to Taiwan's economy.

Even the US, which is so much bigger than Taiwan, has felt the results of China's unfair trade practices. The US trade deficit with China hit a record US$200 billion last year, a figure that has concerned both the government and opposition parties.

This has happened despite the fact that US foreign trade accounts for only 16 percent of its economy.

This is not the case for other global powers like Japan, whose foreign trade comprises one quarter of its economy, and China, where the figure is more than 75 percent.

These figures indicate that China's economy depends more heavily on the US than the other way around.

Second, China has clearly shown its intention to promote a "united front" agenda via business channels. The purpose of Beijing's ongoing advocacy of the "mini three links" is to control Taiwan through trade and the economy, because in this way it can realize its ultimate goal of annexing Taiwan.

If Taiwan continues to allow a situation in which there is considerable capital outflow, this will give China a stick with which to pressure Taiwan in any future negotiations.

Pro-independence Taiwanese businessman Hsu Wen-lung (許文龍), leader of the Chi Mei Group, and pop singer A-mei (張惠妹) are only two people who have been forced by China to come to a political compromise.

Their examples show that China's "united front" tactics have yielded concrete results. The more capital Taiwanese businesspeople invest in China, the more leverage they give Beijing to force Taipei to accept its political agenda.

This is clearly a very dangerous situation.

Finally, it only requires a crisis in China's economy to entangle Taiwan in severe financial difficulties.

According to World Bank figures, the volume of bad debt in Chinese banks has reached US$600 billion, a quarter of China's GDP.

This worsening of this crisis is only being held in check by China's high level of savings. Chinese save around 45 percent of income, the world's highest rate, because they have little confidence in the future.

As soon as there is a financial crisis, these savings will be withdrawn, and this could trigger an economic collapse.

In the US, confidence reigns, so the savings rate is in negative figures (minus 0.5 percent). According to figures from Time magazine, the average savings ratio in the US from 1929 is a mere 7.6 percent.

Japan last year initiated "active management" policies in regard to its outward investment. It has shifted its investment focus from China to India, contributing to a 42 percent increase in the Indian stock market.

Taiwan must also diversify its investments. With the incorporation of diversification into its own "active management" policy, this will protect the development of the economy and serve as an important plank in its security.