Friday, January 18, 2008

Irrational exuberance

by Jonathan Adams
FEER Forum, January 18, 2008

To look at the Taiwan stock index this week, you’d think the China-friendly Kuomintang had already won the presidency and reopened talks with Beijing. The market jumped 5% on Monday and Tuesday—its biggest gain since mid-2004—led by stocks in airlines and banks that could profit from closer cross-strait links. It shed 1% later in the week, but exuberance is still in the air.

It’s time for a deep breath. A KMT victory in the March 22 presidential race isn’t a sure bet, despite the party’s landslide victory in a legislative vote Saturday. And even if KMT candidate Ma Ying-jeou takes office, it’s uncertain how quickly he could reach deals with Beijing. Moreover, closer cross-strait ties, though helpful in some sectors, won’t fix structural problems in Taiwan’s economy.

Certainly, there is some cause for increased investor confidence. The KMT’s nearly three-quarter majority in the legislature will put the brakes on any possible moves toward independence for the next four years. Beijing was especially concerned about constitutional revision touching on issues of national sovereignty; that looks highly unlikely now.

But what’s being exaggerated is the likely speed and degree of progress on cross-strait links.

First, the KMT’s chances in March. As Ma adviser Su Chi told me Monday, “We’ve just passed the midterm, but now we have to take the final exam.” The party itself is cautious, and not without reason.

Unlike legislative votes that turn mostly on local issues, presidential races in Taiwan tend to hinge on the emotional issue of national identity. The KMT’s rival, the pro-independence Democratic Progressive Party, has an edge on that battleground. Turnout Saturday was under 60%; it was 80% in the last presidential race—and strong turnout is again thought to work in the DPP’s favor. That’s not to say the DPP will win; just that the race will be closer than Saturday’s lopsided result would suggest.

The stability-loving market has overlooked something else. Beijing’s key near-term concern remains the planned referendum on whether Taiwan should seek to join the United Nations under the name “Taiwan.” That vote appears set to go ahead March 22.

That’s not the only reason to doubt the next two months will be stable. Taiwan’s politics are notoriously unpredictable. As the campaign heats up, supporters of both parties can be expected to engage in “dirty tricks” to influence the vote. The only question is how dramatic and destabilizing such antics will be. In other words, don’t expect a clean election season.

Even if Mr. Ma does win, many seem to be assuming he’d immediately kiss and make up with Beijing’s leadership, and all will be well in the Strait. That’s premised on his stated acceptance of the so-called “1992 Consensus” as a basis for talks—a convoluted formula whereby Taipei and Beijing both agree on the “one China” principle. The rival DPP rejects this formula as a sell-out of Taiwan’s sovereignty and dignity.

In fact, Mr. Ma’s interpretation of “one China” is the Republic of China (Taiwan’s formal name)—and there’s no guarantee yet that this will be enough to placate Beijing. That’s not to mention the likely uproar Mr. Ma would face at home if he negotiates with Beijing on this basis.

Even granting he’s successful, the benefits he’d gain for Taiwan shouldn’t be overstated. Direct links are seen by many as an elusive Holy Grail for Taiwan’s economy. Mr. Ma’s plan focuses on such links, and on old-style infrastructure investment to reinvigorate the island’s economy.

That can only take the island so far. Broader structural problems would remain. Perhaps the most pressing is to liberalize and revamp the island’s services sector—especially the banking sector. Without such reform, direct links would only provide temporary relief for what ails Taiwan in the longer term.

So what’s a more realistic assessment? Unilateral moves on Taiwan’s side to forge closer cross-strait ties are a good bet under either Mr. Ma or (perhaps more slowly) his DPP rival Frank Hsieh. That means reducing the China-bound investment cap for listed Taiwanese firms, allowing in more Chinese tourists, weekend cross-strait charter flights, and possibly a cross-strait banking breakthrough. (At present Taiwan banks can’t do business in the mainland; they could do so if an agreement is hammered out through talks in a third location by banking associations on both sides, without government involvement).

Dicier bets are any progress requiring government-to-government talks, such as regular, weekday cross-strait flights. And if you’re wagering on broader improvement in Taiwan’s economy? Don’t bet the farm.

Mr. Adams is a free-lance journalist based in Taipei.

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