The volume of daily transactions for the TAIEX has rarely exceeded NT$100 billion (US$3.38 billion) of late.
On Dec. 4, new Financial Supervisory Commission Chairman William Tseng (曾銘宗) lamented how, in the period between the first quarter of 2008 to the first quarter of last year, an average per quarter of 1,253 major investors carried out transactions worth at least half a billion New Taiwan dollars, but that this average had halved to 664 from the second quarter of last year — with the implementation of the capital gains tax on securities transactions — to the third quarter of this year.
The question is why, despite the government’s decision to drop the tax on investments under NT$1 billion five months ago, have these large investors not returned?
We can get something of an answer from the large ads placed in Chinese-language newspapers in Taiwan recently, congratulating the China-based China Construction Bank for issuing offshore Chinese yuan bonds, named “Formosa bonds” in Taiwan, or, as the ads controversially put it, “on the island” (島內).
Taiwanese banks are scrambling to grab what they perceive to be the business opportunities afforded by the issuing of 6.7 billion yuan (US$1.1 billion) worth of bonds in Taiwan by four major Chinese banks. Far from being beneficial to the economy, this may well have a detrimental effect, because these bonds involve converting Taiwanese financial resources into Chinese yuan for use in China.
If their listing fails to attract at least an amount equal to their listed value in foreign investment injection, it will result in a depletion of Taiwan’s financial resources.
Policy measures such as the Taiwan depositary receipts (TDR), which President Ma Ying-jeou (馬英九) championed when coming to power, to entice Taiwanese businesses in China to return to Taiwan, also drew hundreds of billions of New Taiwan dollars’ worth of capital out of Taiwan’s financial markets.
Of this capital — aside from a small portion being used for property speculation in Taiwan — the majority went to China, contributing to China’s 12th five-year plan.
However, it is not just the TDRs that are behind this weakening of the Taiwanese economy: These are just a small part of the problem. More pernicious is the unbridled development of the Chinese currency deposits business.
In the short eight-month period from Feb. 6, when the government deregulated yuan deposits in domestic banking units (DBU), to October, yuan deposits in DBUs rocketed to 88.5 billion yuan. This rate extrapolates to an annual increase of 132 billion yuan, the equivalent of approximately NT$640 billion and equal to 53.3 percent of NT$1.2 trillion, the average annual increase in Taiwan’s M2 money supply for the 10 years from 2001 to 2011.
In other words, more than one half of Taiwan’s annual increase in the money supply is not available for use in Taiwan, and is being used in China instead.
Note that this amount — of Taiwan’s financial resources flowing out to China — does not include the capital expenditure of Taiwanese banks purchasing local bank premises in China or setting up subsidiary banks there, and neither does it include offshore banking unit (OBU) deposits.
The period between 2000 and 2010 saw the mass exodus of Taiwan’s manufacturing businesses to China, a flight that was, at the time, aided and abetted by pro-China voices within the media and academia advocating the “getting orders for goods in Taiwan, manufacturing them in China” model of industrial development.
The outcome of all this is that now over 51 percent of our manufacturing is located overseas — read China — and this is the source of much suffering for many people in Taiwan. The unemployment rate among young people is as high as 14 percent, and more than 40 percent of the people who do have jobs are on salaries of less than NT$30,000.
Despite this, the government has still not learned. It is making the same mistake as it did with manufacturing, with the policy of allowing finance to go over to China that it has followed since 2011.
With the growth in yuan deposits already exceeding 50 percent of the increase in M2 money supply, the impact of this conversion of Taiwan’s financial resources into yuan will certainly be as detrimental as the “getting orders for goods in Taiwan, manufacturing them in China” model has been. The sluggishness of the TAIEX is but one of the repercussions we will see.
Huang Tien-lin is former president and chairman of First Commercial Bank.
Translated by Paul Cooper