Sat, Nov 18, 2006 page8

• We cannot afford the bank push into China

  • By Lin Chia 林洽
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  The legislature has held preliminary deliberations on passing amendments to the Act Governing Relations Between Peoples of the Taiwan Area and the Mainland Area (兩岸人民關係條例) that would permit financial organizations to establish branches or invest in China. According to some naive pan-blue legislators, there is a good reason for this: People in other countries do it, and foreigners are no fools.

  But the Taiwanese aren't necessarily as qualified to do the same things as people in other countries. We might also analyze this question in light of the principle of proportionality adopted by Taipei Mayor Ma Ying-jeou (馬英九) in handling the red-clad anti-President Chen Shui-bian (陳水扁) protesters.

  Only adults who are strong swimmers and have proper rescue equipment are qualified to go swimming or fishing in the ocean. Children who have just learned to swim and who don't have the safety gear would only be inviting death. For financial companies, China is a churning, storm-swept sea. Companies from Western capitalist countries have the swimming skills and equipment to survive, but Taiwanese firms are small children with deflated life preservers.

  The US economy is 30 times larger than Taiwan's. It can easily absorb any losses incurred from investing in China without destabilizing its financial and social systems. Apart from private equity funds, most of the banks that have invested in China are major international firms from Europe and the US, such as HSBC and Citibank. For example, Citigroup's total assets are around US$1.75 trillion, so a misstep in any country wouldn't shake its stability.

  In contrast, the combined total assets of all banks in Taiwan is only US$800 billion. In addition, large European and US banks have a long history and experience to draw on, and are also geographically widespread; Citibank was founded in 1812 and was in Shanghai by 1902. These banks have improved their management systems, skills and experience over a very long time.

  Taiwan has yet to develop a social and moral culture compatible with the competitive nature of capitalism. In the decade from the early 1990s when the government lifted restrictions on the establishment of private banks, at least NT$100 billion (US$3.05 billion) had to be spent on propping up banks with bad loans and shortages of funds resulting from misappropriation.

  Following the government's initiation of the second stage of financial reform, the public began to suspect the operations and ethical standards of three of the nation's model banks: Taishin International Bank, Chinatrust Commercial Bank and Taipei Fubon Commercial Bank. As for financial and banking oversight, the corruption symbolized by the recent detention of Financial Supervisory Commission member Lin Chung-cheng (林忠正) is certainly nothing new.

  If financial institutions expand into China, then this will only unnerve the inept agencies in charge of supervising them. What's worse, China still refuses to sign any memorandum of understanding for supervisory cooperation with Taiwan. This reflects Beijing's resolve not to come to the aid of Taiwanese firms if they run into trouble.

  If banks expand their business into China in advance of a possible financial crisis, they could soon suffer a serious blow. Over the last decade, these banks have caused direct or indirect damage worth more than US$100 billion to this country. Expanding into China will only compound these problems. When the Taiwanese economy suffers disproportionate harm, the government will be forced to follow Ma's lead by doing nothing when a threat arises. If that happens, then Taiwanese really will have to jump ship.

  Lin Chia is an independent economics commentator.

  Translated by Marc Langer and Daniel Cheng

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