Fri, Sep 07, 2001 page18

• China flexes muscle in CSFB ban

  LEVERAGE The Swiss bank is the first to be punished for its relationship with Taiwan, a clear sign that China plans to use its growing economic clout to push for unification

  • BLOOMBERG
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  China's punishment of a Swiss bank and a Japanese phone maker for Taiwan gaffes may suggest it will use expanding economic clout to further a 50-year quest to reclaim the island.

  The Chinese government ejected Credit Suisse First Boston Inc from a multibillion share sale last week after it sponsored a tour with Taiwan government officials. It banned Matsushita Communication Industrial Co from selling mobile phones last month for a year because its handsets had a reference to the island as the Republic of China.

  The disputes signal a new approach by China to achieving its biggest political goal since regaining sovereignty over Hong Kong in 1997. As the island teeters on the brink of recession, China has economic leverage like never before.

  "China has expanded its foreign-affairs war against Taiwan to an economic war," said Leo Sheng (盛若望), who manages NT$400 million (US$11.6 million) at Shinkong Investment Trust Co (新光投信) in Taipei. Because Taiwan companies need to expand in the world's biggest consumer market, "they'll accept the `one-China' policy."

  China has long used international politics to push its claim over Taiwan. In June, the Balkan nation of Macedonia switched its allegiance to Beijing from Taiwan, leaving not one European state except the Vatican among the two dozen nations that formally recognize the island.

  Coke, Morgan Stanley

  And it isn't the first time that multinational companies have run afoul of Chinese authorities for Taiwan-related gaffes. Coca-Cola Co dropped Sprite television ads in China last year because they featured Taiwan pop star A-Mei (張惠妹), who had recently sung Taiwan's national anthem during the inauguration of President Chen Shui-bian (陳水扁).

  Such instances have been rare, however. Though banks have incurred China's wrath before -- Morgan Stanley Dean Witter & Co lost a mandate after its analysts helped drive down Hong Kong stocks in 1997 -- never before has one been punished for its relationship with Taiwan.

  Many analysts say China is stepping up such attacks because the world's biggest consumer market is still growing: the economy expanded faster than 8 percent every year since 1995. In Taiwan, by contrast, the economy shrank in the second quarter for the first time since Chiang Kai-shek (蔣介石) and his Nationalist Party fled there after losing the Chinese civil war in 1949.

  "Obviously, China's economic leverage is growing," said Yan Xuetong, a China security expert at the Institute of International Studies at Beijing's Qinghua University. "China no longer needs this investment from Taiwan."

  Further evidence links are growing came today, when Chunghwa Picture Tubes Ltd (中華映管) of Taiwan said it plans to sell shares in its China unit to fund local expansion. Chunghwa, which began cathode- ray tube production in Fuzhou in 1995, moved two production lines to China from Taiwan last year and plans to move two more lines there next year.

  By selling shares of a local unit in China, Taiwan companies can avoid current Taiwanese restrictions on the size of investments in the mainland. It's not as if Taiwan companies get special breaks because they are based in what China considers to be its territory.

  `Marginalized'

  With the exception of Shanghai, which eased rules in August, Taiwanese investors are limited to buying real estate in particular areas in most Chinese cities, just like other foreign investors. Tai-wan banks and insurance companies, moreover, are treated like financial firms from the US and Europe.

  Still, China is now the biggest market for everything from cellular phones to chickens. By some estimates, China now accounts for 50 percent of all foreign direct investment in Asia outside Japan, up from 20 percent in the early 1990s.

  Taiwan's investment during the past decade can't be discounted: it totals US$100 billion, making it China's fifth-biggest direct investor, according to CLSA Emerging Markets.

  More companies are likely to flock to a nation where average wages in Jiangsu Province, for example, are one-sixteenth of factory wages in Taiwan and where workers lack any organized labor union.

  "Taiwan will have to open itself to China or run the risk or being marginalized," said Tim Li (李杜榮), chief financial officer at Quanta Computer Co (廣達), Taiwan's largest notebook computer maker.

  "The migration of Taiwan companies to China is an unstoppable trend," said Li, who runs Quanta's Shanghai-based China unit.

  In Taiwan, meantime, some analysts blame President Chen, whose party long advocated independence, for unwittingly playing into China's hands by failing to spur economic growth.

  "Many people elected President Chen in the hope he would hold up Taiwan's independent status," said Vickie Hsieh, chief economist at President Securities Corp (統一證券) in Taipei. But he is pushing Taiwan towards China's arms by messing up the economy."
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