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Beware the attraction of the yuan

Central bank Governor Perng Fai-nan (彭淮南) said before the New Year: "Now is the best time to open up and let Chinese yuan be exchanged in Taiwan."

He added that "preparations could be completed within one week."

Premier Su Tseng-chang (蘇貞昌), who is known for his energetic political trailblazing, immediately directed responsible government agencies to prepare to revise the relevant regulations. It seems that exchange services for Chinese yuan will come into effect soon.

Perng later clarified that he meant it was the best time to allow yuan to be exchanged in banks, not by the general public. Nevertheless, there is the more fundamental question of whether it is wise to allow people to exchange the yuan for NT dollars.

In fact, the implications of the term "exchange" are rather complex, because as long as yuan are received, there will be the matter of disposing of them.

As a result, issues of buying, selling and swapping yuan will arise. Given that, there will inevitably be long and short-term "holding" of the yuan, which could turn it into a medium for domestic commodity trading.

Some government officials believe that exchanging yuan is just like exchanging US dollars -- nothing particularly special about it. But in fact, for Taiwan, there are two large differences between the yuan and the US dollar.

First, China has always been unwilling to sign a bilateral monetary clearing agreement with Taiwan. This has nothing to do with the issue of sovereignty. In fact, Taiwanese businesspeople have invested 2 trillion yuan (US$250 billion) in China. Therefore, monetary cooperation should be a big deal. If both sides of the Taiwan Strait act earnestly, then they should be able to find a resolution.

But China has rejected any proposal to sign a monetary clearing agreement with Taiwan. This means that China believes that if any problems related to the opening of the yuan market in Taiwan occur, the Taiwanese government is to blame, rather than the Chinese government.

In other words, if in future there are any problems caused by exchanging the yuan in Taiwan, China will not have any obligation to help resolve them.

But if China uses the yuan exchange services in Taiwan as an opportunity to directly or indirectly pull the strings of Taiwan's economy, then China will still be able to shift the blame onto the Taiwanese people, market forces, or possibly even criminal groups.

Second, there are more than 1 million Taiwanese businesspeople in China, who travel back and forth between the two sides and are deeply involved in China's domestic economy. Given that they are in the habit of using the yuan in China, it is likely that permitting yuan exchange, disposal and holding in Taiwan's banks will extend the same habits to Taiwan.

At first, they will use the yuan to discharge their debts and resolve multilateral trade and investment issues in China. But the lines would gradually become so blurred that yuan could be used in purely Taiwanese business affairs. Eventually it may even be used in retail business transactions.

The phenomenon of yuan entering the retail business market in Taiwan would become even more problematic as time goes by and as more people do business or travel in China. Each person traveling to China will be permitted to carry 20,000 yuan, which is no small amount of money.

After people come back to Taiwan, they may not want to change the yuan that they have left over for Taiwan dollars to avoid paying extra exchange fees.

In the end, that money will end up circulating in local markets. What's worse, China-based Taiwanese officials could even directly spend the yuan they received as their salaries in Taiwan in order to avoid exchange rate risk. When the use of the Chinese currency in Taiwan becomes widespread, the government will have no way to control it.

Eventually, the government will have to give up trying to contain the widespread use of yuan and instead allow it to run wild over Taiwan. As a result, the yuan may replace the New Taiwan dollar, which is no different from granting China Taiwan's right to mint its own currency.

In this case China could allow more of its yuan to be circulated in Taiwan or even print more yuan to buy all sorts of Taiwanese products and resources on the cheap. This is China's incentive to push for the opening up of yuan exchange in Taiwan. Isn't this how China treated Taiwan six decades ago at the time of the 228 Incident?

When the day comes that yuan is freely traded, China will naturally be able to save its missiles and "liberate" Taiwan through economic means.

Of course that isn't the consequence that Perng and Su intend, but history's judgment will still be upon them if they introduce Chinese currency to Taiwan.

Lin Chia is an independent economics commentator.

Translated by Lin Ya-ti
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