Tue, Nov 13, 2007 - Page 8 News List

Debunking the myth of investment in China

By Lu Chun-Wei 盧俊偉

There is an ongoing debate on whether Democratic Progressive Party (DPP) presidential candidate Frank Hsieh (謝長廷) will relax the 40 percent cap on investment in China if elected.

But a whole myth surrounds that debate.

The pan-blue camp is using this myth to attack the DPP government's "isolationist" policies in an attempt to push its consistent stance that Taiwan's future lies in China. In doing so, however, they disregard the fact that the capital invested in China accounts for more than 60 percent of Taiwan's total investment abroad.

Official statistics released by the government last year put the figure at 63.9 percent. In addition, Taiwan's exports to China made up 38.6 percent of the nation's exports last year. With such figures, how can there even be talk of isolationist policies? The pan-blue camp is simply using this issue to mobilize political support.

The pan-green camp has also taken advantage of this myth. If we look at the history of Taiwanese investment overseas, we are reminded that the government used to encourage companies and individuals to make indirect investments in China via a third country -- known as the "track two" option -- so that their investments would enjoy economic and trade protection enjoyed by other countries.

Today, although the government has begun, to a certain degree, to open the gates to direct investment in China -- the "track one" option -- many businesses still prefer "track two" because of its financial management and tax advantages. For companies with large projects requiring heavy investment or with a high profile, "track two" is not an option.

As a result, even though the pan-green camp keeps clinging to the "track one" option, domestic capital continues to flow to China via "track two" channels.

From a macroeconomic perspective, the fact that the "track one" option cannot prevent the outflow of capital indicates that the government's capital control capabilities have been eroded by the fast capital movements of globalization. From a public policy perspective, the government should examine the effectiveness of this policy tool.

In this light, Hsieh's proposal to adjust the "track one" mechanism has helped allay the pan-green camp's anxiety over capital outflows and resolve the "myth."

A closer look shows that its cleverness lies in the dynamic management of investment projects on a case-by-case basis, by which a committee or a small team will be formed to examine and decide on individual investment projects in China.

In other words, this mechanism would achieve both the goals of "active management" and "effective opening."

Still, some parts of Hsieh's proposal require clarifications.

How does his proposed committee, or small team, differ from the Ministry of Economic Affairs' Investment Commission and how should their functions be separated?

To deconstruct the legacy of authoritarian rule under the Chinese Nationalist Party (KMT), the DPP has followed up on the transition of political power by introducing elements of democratization outside the existing policy-making mechanism and established various commissions, such as the Environmental Protection Administration's environmental evaluation committee and other deliberative committees.

But these have resulted in violations of the democratic principle of balance between power and responsibility.

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