Taiwan throws open its doors to Chinese investment. Some are worried.Far Eastern Economic Review, June 2009 issue
It’s a momentous change in East Asia’s financial landscape. For the first time, Taiwan is opening its doors to Chinese money—both portfolio investment by Chinese institutional investors, and equity investment by Chinese firms.
That’s one marker of how much cross-Strait relations have improved. Once on the brink of war, the two sides are now playing nice. China has softened toward the self-ruled island it views as a wayward province. Since 2000, economic ties have tightened; that process kicked into high gear when the China-friendly Ma Ying-jeou took power one year ago.
But with opening comes anxiety. Taiwan’s pro-independence opposition warns that Mr. Ma is moving too fast, paying too high a political price and giving up key leverage. Chinese money is just the latest example. By throwing the doors wide to Chinese investment, critics say, Mr. Ma is letting in a Trojan Horse. As China snaps up stakes in Taiwan firms, its sway over the island will grow apace.
The government dismisses such fears. In a talk with foreign reporters last month, Taiwan’s top China policymaker Lai Shin-yuan said the government was committed to safeguarding the island’s interests.
“Some protesters think our government will downgrade or sell out Taiwan’s sovereignty,” said Ms. Lai, head of the Mainland Affairs Council. “We don’t agree—and we think this is political labeling. The accusations are baseless.”
To illustrate its vigilance, the government has borrowed an image from Chinese folk religion: the “door gods,” or menshen. These are a pair of tough-looking protector deities, whose images can still be found on the doors of older Taipei homes. The government insists that like the door gods, it is keeping a watchful eye on all that enters and won’t let harm befall Taiwan.
But try telling that to retired sports teacher Wu You-hong. “He [Mr. Ma] is hurting Taiwan’s sovereignty and human rights,” said Mr. Wu, standing with a group of protesters outside the legislature. “All of his policies are self-belittling. Taiwan is a country, but he’s turning it into a local area [of China].”
So is President Ma’s government guarding the doors, or dancing with the devil?
The answer, of course, depends on your political stance. But behind that charged debate lies a real challenge for the island. China makes no secret that its ultimate goal is to absorb the island politically. So how will Taiwan preserve its democracy, amid the charm offensives, enticements and what’s likely to be a flood of investment from the economic giant next door?
Opening the Door
By opening to Chinese money, Taiwan seeks to give its flagging economy a jolt. The export-dependent island has been hard-hit by the downturn, and the government sees China as a big part of the cure. The new policies will also correct a sharp imbalance in investment flows. Since the 1980s, Taiwanese have pumped $100 billion to $150 billion into China, according to Taiwan’s Mainland Affairs Council. Meanwhile, aside from one special case (Lenovo’s purchase of the Taiwan unit of IBM), nary a yuan has come into Taiwan directly.
That’s about to change. In late April, at the third round of cross-Strait talks in a year, the two sides inked a statement on financial cooperation. That was quickly followed by more concrete steps. Taiwan opened its capital markets to Chinese money in late April; China said it would let qualified domestic institutional investors invest in Taiwan from May 1.
Taiwan then announced it was drafting a list of around 100 sectors to be opened to direct investment by Chinese firms. The list is still under review by Taiwan’s Cabinet; economics officials hope to release it by late June and start taking applications in July. Taiwan officials say the first sectors to be opened will include automobiles and auto parts, textiles, plastics, computers, cell-phones, hotels, shipping, airways, herbal medicine, rubber and wholesale firms. The investment hype went into high gear on April 29, when news broke of a landmark deal: an agreement by China Mobile, the world’s largest carrier, to buy a 12% stake in Taiwan’s Far EasTone Telecommunications for $544 million.
Limits on indirect Chinese investment—for instance, through Hong Kong or Cayman-Island subsidiaries of Chinese firms—are also easing. Just a year ago, Taiwan demanded a time-consuming review process for any deal involving Chinese shareholders and often nixed such plans. Now, if a firm has less than 30% mainland Chinese investment, it will be treated like any other foreign firm, according to Emile Chang, an official with the Taiwan Ministry of Economics’ Investment Commission.
One example is Hong Kong’s Bank of East Asia, which wants to buy the Taiwan securities unit of American International Group. “Last year, we probably would have said no—we would disallow this case,” said Mr. Chang. “But this year we are reviewing it.”
All of these changes are ringing alarm bells for Taiwan’s opposition Democratic Progressive Party. International Affairs Director Hsiao Bi-khim insisted her party also wanted more economic ties with China. Their problem is with the current pace of the opening, and the government’s opaque decision-making process.
“We support opening, but with greater caution,” said Ms. Hsiao. “The current government is moving too fast, and losing leverage in the process.”
Ms. Hsiao said her party doubts that the Taiwan government will be able to counter Beijing’s “strategic manipulation” of Chinese money. She said the government is naively brushing aside security concerns and isn’t looking out for Taiwan businesses’ interests. For example, the government should conduct an industrial impact assessment on all the sectors that are set to be open to Chinese money to ensure such opening will benefit Taiwan.
President Ma’s decision-making process comes in for especially cutting criticism. The DPP calls cross-Strait talks “black-box negotiations,” because the participants and locations are well-kept secrets. The public meetings, such as the one in Nanjing in April, only formalize deals that were already struck before, under mysterious circumstances. So far, agreements with China have not been subject to legislative review, Ms. Hsiao pointed out, despite efforts by the legislative speaker, from Mr. Ma’s own party, to set up a cross-Strait affairs working group.
Technically, cross-Strait agreements don’t require legislative approval—they become law within 30 days of being inked, unless rejected by the legislature. (Some related changes to regulations do require legislative approval, however, such as opening public construction projects to Chinese money). Therefore, Mr. Ma says, no oversight is needed. He insists all deals so far are strictly economic, and have not touched on politics.
But the DPP points out that the deals Mr. Ma’s government is inking, such as opening Taiwan to Chinese money, have security implications.
“Here we are at the front line, with 1,000 [Chinese] missiles pointed at us, and yet the government is doing nothing to protect our strategic sectors,” said Ms. Hsiao. “There are a lot of potential problems we can foresee, especially in sectors like telecoms and energy. Essentially we’re handing over our lifeline to China.”
Obstacles Remain
Yet the opening to Chinese investment isn’t quite as far-reaching as it might appear. Interviews with officials here show that Chinese money will still face a gauntlet of regulations and red tape—particularly when it comes to sensitive sectors like those Ms. Hsiao mentioned.
Take portfolio investment. Officials from the Financial Supervisory Commission pointed out that China still sharply limits QDII investment in Taiwan. Taiwan’s government estimated that the cap was around $220 million in early May, or 3% of the total assets of the 10 qdiis that can invest in Taiwan. That cap could be lifted once a memorandum of understanding for securities investment is signed, but there’s no timeline for that.
Meanwhile, Taiwan rules bar Chinese from holding top management jobs or sitting on the board of directors of Taiwan firms. Officials said they would be sensitive to public reaction to proposed Chinese investments. “If our people say it’s not a suitable investment, we’ll ask the investors more about what their objectives are,” said one official, who did not want to be named. “If [Chinese investors] want to control the company, that would violate our regulations.”
Direct investment by Chinese firms will also face limits. One example is telecoms. The Mainland Affairs Council’s Ms. Lai said that it would not be included in the first round of sectors to be opened to Chinese money, meaning the China Mobile and Far EasTone deal is likely to be delayed indefinitely.
“Mainland investment coming to Taiwan is a new thing, so we have to proceed in a measured and orderly fashion,” said Ms. Lai. “We also have to look at our domestic industries—if they involve key technologies or are related to national security, then that would not be open to mainland investment.”
The Investment Commission’s Mr. Chang seconded Ms. Lai on telecoms. “The sector touches on national security concerns,” said Mr. Chang. “In telecoms, almost everything is now running over the Internet. So if you can control telecoms, you can control the Web.” Will the sector open down the road? “The President makes the decision,” he said.
For his part, Mr. Chang sees Chinese investment plans quickly running into political headwinds. He compared it to the outcry in the United States in the 1980s, when Japanese investors snapped up property in New York City and elsewhere. In Taiwan, where the pro-independence camp is strongly anti-China, emotions can be expected to run much higher.
“Should we encourage mainland Chinese companies to buy our publicly listed companies?” asked Mr. Chang. “That may raise a political issue, especially if it involves our leading companies, which are ‘the pride of Taiwanese.’ A lot of people won’t want to see this kind of [investment] project happen.”
As the comments above make clear, fears about Chinese investment are probably exaggerated. Many limits will remain, and should prevent Chinese from exerting substantive control over Taiwan’s key industries.
Meanwhile, opening to Chinese investment has the potential to raise Taiwan’s profile on East Asia’s financial map. Financial Supervisory Commission officials noted that opening to Chinese money has knock-on effects.
“If we have good relations with mainland China, foreign investors will have confidence in Taiwan, and we’ll attract funds from them,” said one official. That’s already begun to happen—the cross-Strait news in late April and early May sent Taiwan’s stock market surging, which analysts credited in part to buying by foreign institutions.
Moreover, the latest Mainland Affairs Council poll (which the opposition dismisses as biased) showed that 64.5% of Taiwanese were “satisfied” with the cross-Strait consensus on two-way investment inked in late April; 30.9% were “unsatisfied.”
Yet the opposition has legitimate concerns. Mr. Ma’s insistence that the current opening is purely economic is unconvincing. Given China’s grand strategy of unification, all interactions between the two sides are inescapably political. All the more reason for close oversight.
Second, Mr. Ma hasn’t done enough to inform the Taiwanese public and other stakeholders of his government’s plans and to build consensus. He’s thereby fueling fears at a time when people need reassurance.
The government acts as though Taiwanese should simply trust them to protect their interests, as they would trust in door gods, or other hidden deities working in mysterious ways on their behalf. But 21st-century, modern democracies do not run on faith. They run on clear communication, transparent decision-making and submission to oversight by the legislature, the opposition, the media and the public.
It’s encouraging, then, that Ms. Lai at least seems to acknowledge such shortcomings. “We have to strengthen our communication with the public, and our discussions with the opposition,” she said. That will be especially important for the Ma government’s next major agenda item in cross-Strait opening: a trade agreement with China, the so-called “Economic Cooperation Framework Agreement.”
The details of the pact remain unclear, but it would likely lower tariffs on a range of goods, including petrochemicals. Mr. Ma wants to ink the ECFA by the end of 2010. But the Taiwan public will be watching closely to see how it is structured, and how the decisions on it are made.
For the sake of his economic agenda, and the health of Taiwan’s democracy, Mr. Ma would do well to heed their concerns.
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