Fri, Jul 21, 2000 page12

• A new economic reality in Taiwan

  • By Ben Chuang 張忠本
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  Many factors combined to trigger the recent stock market plunge. They were:

  1. Investor pessimism. Domestic businesses are worried about increased production costs and taxes because of: reduced work hours, the five-day work week, reductions in foreign labor, a proposed "national security tax," income tax for civil and military servants, taxes on stock-dividend bonuses of employees at market value and tax hikes to finance the national pension program. People were unnerved by the overwhelming pessimism. This led investors to sell off their stocks.

  2. Cross-strait tensions. Ever since Chen Shui-bian (陳水扁) was elected president, China has intensified its verbal attacks and threats to use military force to coerce Taiwan into accepting its "one China" policy. Neither the "five no's" statement in Chen's inauguration speech nor the "one-China with each side free to make its own interpretation" has received a positive response from Beijing. In the face of escalating pressure from China, people still have very wide-ranging opinions about cross-strait relations. Without a reduction in the current tension across the Taiwan Strait, both the real estate and stock markets will find it difficult to bounce back.

  3. Seasonal changes in the stock market index. After the dividend payouts, the market usually takes a summer break. Investors usually adjust their portfolio before businesses release their sales records in September and October. If economic prospects look bright, bullish transactions then boost the market. As a result, a fall by 1,000 to 2,000 points in the TAIEX index is natural given that the market is currently in its low-tide phase.

  Since the fourth quarter of last year, investors have bought heavily to take advantage of the government's market stimulation package introduced before the presidential election. Many share prices have been overvalued with prices trading at 50 to 60 times their earnings. The prices of some companies, including emerging Internet companies, communications corporations and companies which produce passive devices, have been over-bought. It is normal for their prices to fall now for correction.

  4. Losses due to financial crisis. The financial crisis from October 1998 to last March contributed to a financial crunch at 19 conglomerates and NT$230 billion worth of bad debts. To maintain political stability, the government tried to bail the conglomerates out by deferring the deadline for their repayments. Now, one year later, these efforts have failed and many financial institutions are under heavy pressure to write off these bad-debts.

  Some conglomerates which used to rely on their contacts within the KMT and the government for financial resources, are on the brink of bankruptcy -- including several KMT companies. Some people suspect that the KMT's recent massive sell-off was to destabilize the market. In my opinion, however, the KMT has sold its share holdings and entities in an attempt to provide badly needed capital for its cash-strapped businesses.

  It is the same with private conglomerates, especially those which have invested heavily in real estate. They have had high percentages of stock collateral in banks and had problems selling their assets for enough cash to help them pull through their hardships. Since the new government took office, no political heavyweights dare to offer aid to bail out troubled businesses.

  Bank staff in charge of loan granting now use fixed standards to process applications and reject illegal intervention from special interests. Businesses under serious financial pressure can neither get new loans nor defer payments for old ones, so they have sought to raise cash by selling their shares. This has increased the selling pressure on the market. Many investors regard these moves as a sign of an imminent market collapse and dump their holdings in panic. If a new financial crisis breaks out, some private banks may not be able to survive if big conglomerates fail.

  Although the TAIEX's prospects for the second half of this year look dim, we are still confident of Taiwan's long-term economic development, especially the semi-conductor industry. The DRAM, Flash, and OEM industries will see significant growth in the next two years. Investors are also optimistic about industries which have long been ignored, such as China Steel and Yieh United Steel.

  The migration of domestic businesses to China, moreover, is only a transformation of the current economic structure -- a move to upgrade their competitiveness and expand their business operations. This change is beneficial for Taiwan as it does not represent a transfer of resources, but an expansion and strengthening of them.

  Another characteristic of commercial activity in Taiwan is that our economic resources are more evenly distributed into different industries than, say, in Japan and Korea, where ownership of traditional, real estate, financial and high-tech industries overlaps excessively. In those two countries, a failure of a number of businesses in a specific sector will influence that sector's economic prospects and even those of the whole country. Given Taiwan's different industrial structure, the domino effect of financial crises should be able to be contained within certain industries.

  Despite Taiwan's strong economic prospects, there is still concern over the government's deficit. The government owes a huge debt -- a ceiling of NT$2.4 trillion dollars by the end of this year -- even without new social welfare programs. What's more, the financial deficit is expected to climb to NT$500 billion. Those in power must acknowledge the gravity of this problem.

  The government's financial headaches have stemmed from the practice of populist democracy over the past 10 years. The government's 1990 NT$200 billion debt has swollen 10-fold over the decade. The KMT government cut taxes levied on conglomerates and withdrew plans to implement a sound, professional structure for tax collection. Previous proposals to levy a securities transaction tax and collect the land appreciation tax by its market value failed.

  Recently however, preferential tax measures for businesses such as amalgamation of the business tax and the personal tax into one unified tax and the reduction of business tax for the financial industry, and so forth have been implemented.

  The 25 percent business tax in Taiwan is the second lowest in the world. Given the five-year tax exemptions for certain industries and tax-deductible incentives on investment, the actual tax collected is even less. Since the unified tax took effect in 1999, the income tax collected from business owners has decreased by NT$70 billion. Last year, the 5 percent business tax on the financial industry was slashed to 2 percent to make up for their loss on bad debts, causing a loss of NT$40 billion in taxes from the industry.

  Both the KMT and DPP have used tax reduction and preferential financial measures to curry favor with voters.The DPP has promoted the pension program for the elderly, the "333 family welfare program" and raising the value of tax credits. It has also said that it will not raise land, inheritance and gift taxes. The KMT also proposed expanding the number of pension recipients by discarding provisions excluding rich people in the elderly pension program, a limitation proposed by the DPP to cap the cost of the program. The KMT's version of the pension program costs NT$36 billion more than the DPP's.

  The issue of working hours is another example. After negotiating with labor groups and business representatives, the Executive Yuan put forth a bill which proposed a 44-hour work week. But the KMT pushed a proposal through the legislature to cut work hours to 42 per week and brought forward the implementation of two-day weekends to next year. From these two examples, we can see the KMT has completely betrayed the stance it took on social welfare policy while it was the ruling party.

  In fact, the market potential and competitiveness of their products, rather than tax reductions, are the major concerns for businesses as far as investment is concerned. Under heavy financial pressure to balance its books, the government's action to reduce business taxes and shift the burden of taxation to wage earners is not fair at all.

  Ben Chuang is the chairman of Polytronics Technology Corp.
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