A recent study of the three players in cross-strait relations has revealed an interesting phenomenon: Not only do Taiwanese consider themselves the richest, but mainlanders and even Hongkongese, whose per capita income exceeds Taiwan's by US$5,000, also think that the Taiwanese have the fattest wallets.
Where does this impression come from? You needn't look far: It was first left by the Santa Clauses from Taiwan who returned to their hometowns on the mainland laden with cash to make up for forty years of separation from their loved ones. And recently it is has been deepened by the columns of Taiwan businessmen--coming openly or furtively--who want to recreate Taiwan's economic miracle on the mainland.
Nevertheless, like the size of Taiwan's underground economy, the amount of Taiwanese capital that has flowed into mainland China cannot be stated with assurance by anyone.
It's a matter of perspective: "Ever since we've liberalized controls over foreign exchange, anyone can legally remit abroad US$3 million a year, and the government can no longer control the flow of capital," explains Liu Shou-hsiang, an assistant research fellow at the Chung-hua Institution for Economic Research.
In addition, bankers believe that a lot of money has gone through the gold shops, the currency exchanges of the underground financial system.
"A Taiwanese business that is going to invest on the mainland isn't going to tell you about it!" affirms York M. Y. Lai, the chief of the overseas division of the Hua Nan Commercial Bank. According to surveys carried out at every branch, only 30 Hua Nan clients have gone to invest in the mainland. "But over 30 clients have come over to have a meal with me when they've just happened to be in Hong Kong." About cross-strait investment, such statistical contradictions are common. According to the most conservative government statistics, at the end of last year, a total of US$-800-900 million had been invested on the mainland with the approval of the Ministry of Economic Affairs. The Chinese communist government, however, has stated that more than US$3.4 billion has been invested on the mainland by Taiwanese businesses. And the Japanese newspaper Nippon Keizai Shibun has reported that as much as US$15 billion has flowed from Taiwan through Hong Kong to the Mainland.
"It's really a case of differing opinions. Based on our records of sales and purchases of foreign exchange, it isn't very possible that the figure is as high as the Japanese put it," says Kao Koong-lian, the vice chairman of the Mainland Affairs Council. According to Mainland Affairs Council statistics, about US$2.5 billion has been brought to the mainland by businesses going to make investments in the mainland and about US$7 billion has been brought over on visits to relatives. When one adds the indirect remittances that have been made since controls on them have been relaxed, the total stands at about US$10 billion.
This estimate is very close to the one offered by Norman Yin, chairman of the department of banking at National Chengchi University. "If one tacks on inventory and raw materials, the figure should top US$10 billion," he says smiling. "When you consider that the Chinese communists currently have only US$40 billion in foreign reserves, you can see how much Taiwanese business has contributed."
Keeping it in the Chinese family: With US$10 billion, you could practically build a high-speed railway. That so much money could flow into the mainland shook up all quarters of Taiwanese society. As a result, Samuel C. Hsieh, the director general of the Central Bank who has authority over foreign exchange, ordered that all banks take note of capital flows. But later, under questioning by legislators, he stated that this flow was a natural result of financial liberalization and that there was no need for excessive concern.
"In fact, investing on the mainland is only one place our investors put their money overseas," says Norman Yin. Less money has been put there than in Southeast Asia and the United States. It's just that mostly small and mid-size companies have been going to the mainland, so the number of firms is large. This has particularly attracted people's attention."
Yu Tzong-shian, president of the Chung-hua Institution for Economic Research, has considered the situation from the perspective of the benefits the investment brings. "Investment can stir up two-way trade." He points out that indirect cross-strait trade totalled US$5.8 billion last year. Trade in March of this year was up 60 percent, and exports were largely machinery and raw materials--obviously triggered by investment. "This situation is the same as when we first started to go to Southeast Asia," he says.
To look at it from the angle of supply and demand, the mainland still has a mountain of debt. In order to strengthen economic reform and carry out such major engineering projects as the Sanxia Dam, it needs large-scale foreign capital support. Taiwan, on the other hand, has a large trade surplus and the largest foreign reserves in the world. Even if, in many respects, having money makes it easy for the government to get things done, idle capital has pumped up speculative bubbles in the real estate and stock markets and resulted in inflationary pressures--all "problems of having too much money." As a result, we are now making use of "our leftovers" by giving them to the mainland. We have, to be sure, always wanted to reduce the economic chasm between us. An obvious example of "keeping it in the family," investing there is advantageous after all.
Gathering capital for an assault on the mainland stock market: But things didn't stop there. Starting this year, there have been a few features of Taiwan investment in the mainland that are particularly worthy of note:
First off, the Central Bank discovered in April that bank loans and investments had increased 26 percent over last year, whereas actual investment in society had increased only 6 percent.
"We also discovered that certain clients were going all out to borrow money, while the amount of money deposited in their accounts didn't grow at all, and this money has probably flowed over there," says Cheng Shih-ching, the president of Cosmos Bank. When most domestic factories borrow money, they first put it in their accounts and draw on it when needed. When they had a surplus, they would put it right back in their accounts. But money going out never to come back was a virtually unheard of phenomenon.
What's more, the mainland stock and real estate markets, following in the footsteps of their Taiwanese counterparts, have started to heat up. There are a variety of indications that Taiwanese money has already entered the mainland's financial markets and is beginning to make waves.
For example, the grade B mainland stocks that have been introduced in Taiwan through foreign commercial banks (stocks aimed at attracting foreign capital) and mainland stock funds have already become hot sellers over here, providing a stark contrast to limp Taiwanese stocks. As a result, security traders have already appointed a fifty-man fact-finding delegation to go to the mainland.
Chinese have always had a special love for real estate, and Taiwanese businesses have already begun to move into the mainland construction industry. Among the several major construction companies that have started to set up operations on the mainland, the Tomson Group won bids on four major projects in June, including an international class golf course in Pudong, with an investment total exceeding US$250 million.
"Currently 80 percent of the foreign firms applying to make investments in real estate in the mainland are from Hong Kong and Taiwan," says Chao Yao-tung, a national policy adviser who returned in June from a fact-finding trip to the mainland. "Taiwan investment has already turned from mere manufacturing to the more speculative stock and real estate markets."
The changing line-up of Taiwan businesses: Another trend worth noticing is that recently, in the wake of Deng Xiaoping's tour of southern China, the pace of economic reform has quickened, restrictions have been lifted on services offered by Taiwanese firms, and the proportion of goods that these companies can sell on the mainland market has been increased. The line-up of Taiwanese firms on the mainland has already begun to experience structural changes.
"Previously, companies going to the mainland were mostly small and mid-size firms that were no longer competitive in Taiwan. Now mid to large firms are preparing to set up over there," analyzes Norman Yin. Previously, with greater uncertainty about investing in the mainland, small firms would mostly take over old equipment and began production the hard way. Neither the market nor the capital was mainland Chinese. In the current stage, not only is the mainland experiencing a startling high rate of growth, but the political atmosphere as well allows Taiwanese investors to rest assured. In order to expand the scale of production and open up new markets, those mid-sized and large firms that decided to set up on the mainland are naturally adopting the long-term considerations of business as usual. With this change of attitude, the total level of investment has risen dramatically.
According to the The Straits Exchange Foundation, most of the contracts Taiwan businesses have been signing with the mainland authorities run for 50 or even 70 years. And according to a report in The Economic Daily News, an official Chinese communist publication, such major financial groups as the Tomson Group, Holmsgreen Holdings, China Rebar and Hualon are making advance plans to invest on the mainland. Hualon alone is planning to invest tens of billions of NT dollars in department stores, real estate, insurance and financial services.
"There are numerous major foreign companies that have repeatedly been in contact with large domestic firms, hoping to invest in the mainland with our powerful assistance," says Huang Nan-tu, the general manager of Weichuan.
The flow quickens: Among these major enterprises, one type has particularly attracted people's attention: banks. The Hua Nan Bank, which is owned by Taiwan Province, has already been permitted to go to Hongkong and establish a branch, taking a step forward in supporting Taiwanese businesses to move their capital according to need. The heads of such private banks as the Overseas Chinese Bank, the Dah An Commercial Bank, the Chung Hsing Commercial Bank, the Fubon Commercial Bank and the Chinese Bank have gone to the mainland themselves in order to assess the feasibility of setting up branches there in the future.
Even if the Mainland Affairs Council has not yet allowed Taiwan banks to go to the mainland, across the strait the news is out: The Chinese communists have already notified two Taiwanese banks that they can establish branches in Amoy.
Taiwanese capital is flowing into the mainland stock and real estate markets; major companies are bringing large amounts of capital to the mainland; and the banking industry has launched its assault on the mainland.... The changing trend represented by this combination of new developments has already bound together capital across the straits, creating an ever more complicated situation.
According to statistics of the Ministry of Economic Affairs, in the first quarter of this year, more than US$300 million was invested by Taiwan companies in the mainland, not including what was invested by Taiwanese using Hong Kong and U.S. fronts.
What's more, banks have discovered that the trade surplus has continued to grow. There was US$2.5 billion in the first quarter of this year alone --but most of it was not remitted to Taiwan. When one adds that capital outflow was as high as US$1.1 billion for the quarter, it is obvious that this wave of mainland fever is bringing capital across the strait at several times the previous rate. On the other hand, Taiwan is in the midst of pushing forward its Six-Year National Development Plan. The manufacturing structure is also in dire need of investment to raise its level. If present trends continue, will a bitter struggle for capital arise between the two sides?
Hot money can't be kept: "One need not be of the same mind about all money going to the mainland. One can judge it separately based on its different uses," says Chen Chin-lung, an expert on mainland finances with the Chung-hua Institute for Economic Research. For example, going to the mainland to set up sales channels is of great assistance in getting Taiwanese manufacturers a piece of the mainland market and is worth encouraging.
Norman Yin holds that some "hot money" has flowed out of the country to seek speculative opportunities elsewhere as a result of the insipid stock and real estate markets in Taiwan. From the start, there was no way to hold onto this money, and hence there's no need to be concerned that some of it has gone abroad. "If it comes back, it will cause problems--won't it?" he asks laughing.
As for the investment by major companies, there are also some facts obscured behind the large figures.
"Large companies have a strong ability to move capital to where it's needed. In accordance with currency exchange and interest rates, we adjust our capital structure," explains Lin Long-yi, the vice general manager of President Enterprises. There are two ways President gets capital to invest in the mainland. The first is by converting NT dollars to US dollars in Taiwan and sending these through Hong Kong to the mainland. The second way is to go abroad to borrow American dollars from a foreign or Taiwanese bank. This latter method "has absolutely no effect on Taiwan capital," says Lin Long-yi.
And the trading surplus is still huge, the NT dollar is continuing to rise, and interest rates for NT dollars are much higher than for US dollars. As a result, big companies like President are looking abroad to borrow American dollars while holding onto NT dollars.
Keeping their confidence is better than keeping their money: Perhaps precisely because of these reasons, the system still has sufficient capital. "The various items of the Six-Year National Development Plan haven't yet entered their peak stages. So in this current period it isn't likely that we will have a problem of lacking capital," says Kao Koong-lian.
But no one dares to be too optimistic about the future. Even Lin Long-yi of President frankly admits that the government ought to pay attention to developments in this regard, establishing precautionary measures.
But adopting these precautions or the reporting system scholars have suggested would both affect Taiwan's quest to become an international financial center. This is the dilemma--between attaining a long-term goal and averting a looming crisis.
"The real focus of our energies ought not to be in obstructing the outflow of capital but ought to be in improving the domestic investment climate," says Yu Tzong-shian, getting to the heart of the matter. Instead of fearing that there won't be enough capital for the Six-Year National Development Plan, the government should give incentives for private investment, and industry will naturally be interested. "Money is something that has life," he says. "You've got to let it flow where it desires."
Pedro Velez, general manager of the Overseas Chinese Service Division of the Overseas Chinese Bank, points out that if the investment conditions in Taiwan are right, capital from other countries will stream in--"all of the world's money will be ours to use."
In fact, as the government continues to face this wave of mainland fever, it seems to care less and less about "cooling it down." The Ministry of Economic Affairs has a deep understanding of the logic behind the expression, "Keeping their confidence is better than keeping their money. "It recently held a series of conferences on economic development across the straits in order to understand the needs of industry; it plans to provide industry with land and capital to help resolve domestic investment obstacles; and it also plans to loosen regulations governing indirect investment in mainland factories--all to make both foreign and domestic investment "hot."
Double heat: Even if industry can't be stopped from going to invest on the mainland, Chao Yao-tung still appeals for industry not to bite the hand that feeds it.
"I'm not saying this as a publicity stunt. Taiwan businesses are respected and given special priority precisely because of what has been done on the island of Taiwan. Besides investing in mainland China, everyone should be facing the question of how to go about leaving a solid foundation on which to rebuild Taiwan," he says with great earnestness.
K.A. Chang of Holmsgreen Holdings believes that Taiwan industry is being welcomed on the mainland because our income, technology and skills are stronger than theirs. "We've got to maintain this trend of advancement," he affirms. "It's like overseas Chinese coming home 30 or 40 years ago. They were all regarded as golden cows." Now, of course, Taiwanese have already enough confidence in themselves. "History teaches us that we can never allow ourselves to fall behind. Otherwise, we won't be respected anywhere."
Holmsgreen Holdings is a good example of a company being bullish about investing both at home and abroad. Chang points out that besides investing on the mainland, the company last year set up shop in Singapore and this year has plans to establish 10 branch companies in such countries as Japan, Vietnam, and South Africa. "But this year investment in Taiwan will exceed 2 billion," he says. "Investment at home will definitely top investment abroad."
[Picture Caption]
Taiwan has the trouble of too much cash, and the mainland is starved for capital. Are they really a match made in heaven?
The big boys are coming! Fighting by the rules has caused the flow of capital across the Strait to increase by several times.
To prevent a cross-Strait capital crisis while investing in the mainland, we've still got to establish an early warning system.
To prevent a cross-Strait capital crisis while investing in the mainland, we've still got to establish an early warning system.
The big boys are coming! Fighting by the rules has caused the flow of capital across the Strait to increase by several times.
To prevent a cross-Strait capital crisis while investing in the mainland, we've still got to establish an early warning system.
