Taiwan might have experienced negative GDP growth during the third quarter, while achieving annual GDP growth of more than 1 percent is looking doubtful.
Why has the nation come to this pass? An opinion piece in the Liberty Times (the Taipei Times’ sister paper) on Oct. 1 last year gives a comprehensive answer to the question. Still, the appearance of negative growth requires additional explanation.
The reason is that during President Ma Ying-jeou’s (馬英九) second term in office, the nation’s financial capital has started to flow out, in addition to the outflow of productive capital. The lack of both productive and financial capital has placed the nation in a more precarious situation than ever before.
The outflow of financial capital began in 2010 as the Economic Cooperation Framework Agreement (ECFA) began to accelerate financial integration across the Taiwan Strait.
Over the past four years, Taiwan’s major banks and financial holding corporations have acted with blinding speed to establish eight subsidiaries in China, with a core capital of NT$83.8 billion (US$2.57 billion). Three are investing a total capital of NT$21.3 billion in shares. They have also established 23 branches as well as 11 sub-branches in China, with a total investment of NT$119 billion.
In addition to that, they have established 18 leasing companies, with a total capital investment of NT$16 billion.
Together, more than NT$240 billion of Taiwan’s core capital has been invested in the Chinese financial sector over the past four years. The result of the investments is that Taiwan’s credit exposure to China has increased from US$4.26 billion in 2012 to US$81.27 billion in the first quarter of last year.
To cover for this expanded risk, Taiwan’s banks need to raise further capital: Covering an increased credit exposure of NT$2.5 trillion requires a capital infusion of NT$250 billion.
Between 2008 and last year, major Taiwanese banks raised NT$486.5 billion from the domestic capital market, but between 2010 and last year, they invested NT$240 billion in China. That accounts for almost 50 percent of the capital raised domestically. Adding the capital needed for covering Taiwan’s exploding credit exposure to China, it is possible to say that almost all of Taiwan’s financial activities during the period were conducted simply to fill the Chinese financial black hole and only a small amount was used for domestic demand.
Moreover, Taiwan has allowed Chinese yuan deposits since 2013 and the interest rates on yuan deposits are slightly higher than on New Taiwan dollar deposits. By August, total yuan deposits in Taiwan had reached 326.9 billion yuan (US$51.5 billion).
At the same time, the number of Taiwanese investing in the Chinese stock market has grown consistently, while Taiwanese banks have pushed for gradually increasing the qualified foreign institutional investor (QFII) quota. Data showed that the QFII quota might have reached US$9 billion. These local financial resources all end up flowing into China.
The outflow of financial resources has already had various negative impacts. It is more difficult for those needing to borrow money, domestic investment is shrinking, fewer people are starting their own businesses, domestic demand is contracting and other industries are following in the financial sector’s footsteps, moving overseas at an accelerating rate, while momentum in the stock market is weakening.