"When cross-strait relations are not doing well, the stock market will do well." This dictum may sound extremely jarring the first time you hear it. People who carry China in their hearts may stomp their feet in disapproval. Indeed, everyone says now, "Only when cross-strait relations are doing well will the stock market do well." But I would like to remind people that, after more than 10 years of experience, the exact opposite is true.
Advocates of the "go west" policy will certainly reject this, saying, "Didn't the TAIEX suffer a steep 284-point fall after the `one country on each side' speech?" That's true, but we should understand that after President Chen Shui-bian (
If we follow normal thinking, this mention of the "one country on each side" dictum should be good news for the stock market.
It's good news for the stock market because tensions rise whenever Taiwan insists on something in cross-strait rela-tions. The other side then makes one angry gesture after the other, causing Taiwan's government, businesses and general public to adopt a more conservative attitude toward investing in China. The capital outflow to China will then slow down, which means the amount of capital staying in Taiwan increases. The stock market will then rise as a result of increased investment within Taiwan.
This process of changes in the direction of capital flow followed by economic prosperity or decline is not just a logical deduction. It has been proven over several decades of practice. The scenario that the pro-unification camp uses as a threat -- that tensions will scare capital away and the economy will then collapse -- has never happened.
Let's look at history. From 1949 to 1987, "absolute irreconcilability" was the key note in cross-strait relations. Hostility ran high and there was no contact. But Taiwan created an economic miracle during that period. The stock market took a big leap forward every few years. In 1990, the government eased restrictions on indirect investment in China.
In 1992, the Statute Governing the Relations between the People of the Taiwan Area and the Mainland Area (
In January 1993, the index fell to a low of 3,098 points. Improving cross-strait relations brought the doldrums, not prosperity, to Taiwan.
Relations tensed once again in the run-up to the 1996 presidential election, with China firing missiles into the seas near Taiwan. In September 1996, then-president Lee Teng-hui (李登輝) proposed the "no haste, be patient" policy aimed at restraining business investment in China. Cross-strait relations hit rock bottom during this period, but Taiwan's stock market started rising all the way to August 1997, when it peaked at 10,256 points. It was the biggest upsurge in the TAIEX index since 1990, once again attesting to the claim that the stock market does well whenever cross-strait relations are doing poorly.
Unfortunately, new regulations for China investments went into effect in August 1997. Cross-strait relations improved and the China fever heated up. Meanwhile, the TAIEX fell into a bear market. In July 1999, Lee redefined cross-strait relations as "special state-to-state" in nature and tensions rose again. Seven months later, the TAIEX once again hit a peak of 10,393 points.
After coming to power in May 2000, the DPP government worked hard to improve cross-strait relations and continuously made goodwill gestures. The investment review committee also approved almost every application for investment in China. Cross-strait relations moved towards greater stability, but illegal Taiwanese investments in Shanghai-based Semiconductor Manufacturing International Corp (中芯) and by Grace Semiconductor Manufacturing Corp (宏力半導體) incurred a capital outflow of at least US$100 million.
Capital losses, combined with the sluggish global economy, led to the biggest slump in 10 years, once again proving that no matter how well cross-strait relations go, they are of no help to improving Taiwan's economic prospects.
On the contrary, such good relations accelerated the fall in real estate and stock prices, and caused non-performing loans and unemployment to rise.
I hope that the above points will make readers understand that the reasoning behind the statement that "when cross-strait relations are not doing well, the stock market will do well" is correct and that the idea that "only when relations are doing well will the stock market do well" harms the economy and deludes the people.
Judging by experience from the period of "absolute irreconcilability," the "no haste, be patient policy" and the "state-to-state" model, the "one country on each side" speech should also create a bull market. One condition, however, is that the government persists and does not retreat. It should adjust the China policy of the last two years -- which was biased toward "active opening" -- back toward placing equal importance on "effective management."
In other words, if finance and economic policies can be appro-priately adjusted within the "one country on each side" framework, the persistence in that framework will also rebuild the confidence and dignity of the people. Investors will then enjoy a period of rising share prices. It is something to look forward to.
Remember this: "When cross-strait relations are not doing well, the stock market will do well." That is the only way that Taiwan will be able to globalize, escape the attraction to China and marginalization, and regain economic freedom.This is also the only way to return to past days of growth and bring wealth to the 23 million people of Taiwan.
Huang Tien-lin is a national policy adviser to the president.
Translated by Francis Huang and Perry Svensson
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