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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Independence party takes a pounding

Taiwan's legislative election result sharply reduces pro-independence party's clout

By Jonathan Adams
The Christian Science Monitor, Jan. 14 2008 (writer's edit)

Watching the election returns come in on TV early Saturday night in her Taipei office, Hsiao Bi-khim – the pro-independence party's point person on foreign affairs – was visibly upset. In district after district, her party was getting pummeled by its rival, the China-friendly Kuomintang.

But asked whether her party's China stance had hurt it at the polls, Ms. Hsiao had a strong message for Beijing. "Independence had nothing to do with this election; the election was based on local issues – whether a highway stops in a district, whether a park is built," said Hsiao. "It would be misleading for China to think that independence is out of the picture."

Taiwan independence may still be in the picture, but the party that champions it -- the Democratic Progressive Party -- has been sharply cut down to size. On Saturday, the DPP picked up only 27 seats in a 113-seat legislature, compared with the KMT's 81.

The KMT's win means that it now has a strong enough majority to recall the president and block any moves to formalize Taiwan's de facto independence through constitutional change. If it wins the presidency on March 22 – by no means a sure thing – the KMT would end eight years of DPP rule and seal its domination of Taiwan politics.

The resurgence of the KMT could usher in a significant thaw in cross-Taiwan Strait relations with China, especially if it goes on to win the presidency in March. That's because a more powerful KMT is widely expected to forge closer economic ties and restart political talks with Beijing. "The future of cross-strait policy will be more conservative and moderate with this legislature," said Taipei-based political analyst Hsu Yung-ming.

But the potential thaw shouldn't be overstated. The KMT will be constrained from getting too cozy with Beijing by the fact that most Taiwanese want to keep the political status quo, under which Taiwan is a de facto independent, democratic country. Unification would simply be a nonstarter.

Beijing prefers a dominant KMT in Taiwan, but it's unclear just how welcoming it would be of KMT presidential candidate Ma Ying-jeou. Mr. Ma has openly criticized China's "anti-secession" law and human rights record, and demanded it withdraw missiles aimed at Taiwan before any political talks can start.

Still, it's expected that the KMT would move quickly on at least two measures long awaited by Taiwanese businessmen and others: direct cross-strait flights (now, passengers must touch down first in Hong Kong or another third location) and the lifting of restrictions on China-bound investment.

The DPP's candidate, Frank Hsieh, also supports closer economic ties with China, but analysts say Ma would make more progress. "If Ma wins, the increasing trend of cross-strait human and economic exchange will be quite positive," said Shi Yinhong, a professor of international relations at Renmin University of China in Beijing. "But if Hsieh wins, China will take a 'wait and see' attitude – there will be no progress in cross-strait relations for at least two years."

It's too soon to call March's election, despite the KMT's decisive win Saturday. In fact, the pro-independence party's overall share of the vote actually increased from the last legislative elections in 2004. That it ended up with so few seats reflected the new, smaller legislative system that uses winner-take-all districts instead of the old multimember ones – a change that favors the KMT.

Presidential elections, however, typically have higher voter turnout and focus on Taiwan's sovereignty – both of which tend to help the DPP. "Presidential elections aren't a choice about candidates or a party," says one KMT insider. "It's a choice about national identity: Do you think Taiwan is a country or not?"

The DPP's proud, unqualified "yes" to that question has helped it mobilize voters in past presidential elections. But this time it will have to surmount long odds and widespread discontent over its performance.

In a working-class Taipei suburb Saturday, voters vented a long list of complaints about the ruling party. "It's done a lousy job," said a fruit vendor. "[Pro-independence president] Chen Shui-bian is still cheating the common people," said her friend. "The DPP has been in charge for eight years, and the economy keeps getting worse," said a noodle-shop customer.

Strolling out of a poll station in flip-flops, Pan Cheng-hou said he still preferred the DPP, but had voted for a KMT candidate to be his legislator because "he'd be better for this area."

Such parochial concerns, gripes over the economy and the new districting system best explain Saturday's result, analysts say. But the consequences remain: with the pro-independence party sidelined in the legislature, the independence movement is sidelined as well – at least for the next four years, and likely longer.

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Fortunetellers busy as election nears

Mystics, psychics, feng-shui masters and a new "predictions market" are vying to call Taiwan's presidential election

By Jonathan Adams
International Herald Tribune, January 10, 2008

It's election season in Taiwan, which means the predictions are flying fast and furious.

The March 22 presidential vote - which follows legislative elections this Saturday - pits Ma Ying-jeou of the China-friendly Nationalist Party, or Kuomintang, against Frank Hsieh of the traditionally pro-independence Democratic Progressive Party. The election, as so often here, is being cast by the island's news media as a high-stakes battle royale, packed with uncertainty, danger and dirty tricks from both parties.

Recent opinion polls are showing Ma ahead of his rival by 20 to 30 points. But publicly available polls in Taiwan have a credibility problem. Many are conducted by partisan media outlets and have proved unreliable.

"Don't look at the numbers right now," advised Liao Da-chi, a political science professor at National Sun Yat-sen University in Kaohsiung.

Many Taiwanese aren't. Instead they're turning to divination and other quirky methods for insight into the weeks ahead. The Taiwan media have featured sensational rumors and predictions from fortunetellers in Taiwan, Hong Kong, even from a psychic based in New York. Meanwhile, what may be the first Chinese-language "prediction market," based in Taipei, will face a major test in whether it can call the election better than the polls.

Fortunetellers remain as popular here as ever, especially in times of personal or national uncertainty. According to the Taiwan Social Change Survey, the number of Taiwanese who believe in "ba zi" (eight characters), a popular method of predicting the future based on the time of one's birth, remained steady from 1994 through 2004 at almost 60 percent. The number believing in "zi wei dou shu," another type of Chinese astrology, rose slightly in that time, from 41 to 44 percent.

"This kind of mysticism has a long tradition in Chinese society," said Chiu Hei-yuan, a sociologist at National Taiwan University. "Our society may be modernized now, but those traditions are quite persistent."

Many well-educated Taiwanese regularly consult fortunetellers. So do some politicians, though few are willing to publicly admit it. When election time nears, they'll consult mystics, pray for divine help through a haze of incense smoke, or assess their electoral chances through "bua buei," the casting of two pieces of wood to learn the gods' response to a question, according to academics and political insiders.

One Kuomintang politician who faces a tight race in the legislative elections this Saturday recently visited a famous temple in southern Taiwan to bua buei about his prospects and received a favorable response, a party associate said, speaking on the condition of anonymity because was not authorized to discuss publicly his colleagues' soothsaying practices.

A fortuneteller and feng shui master based in Taipei, Tsai Shang-chi, said several legislators lost their re-election bids in 2004 after failing to heed his warnings about the inauspicious arrangements of their campaign offices.

Lee Jian-jun, author of the new book "Who Can Win the Presidential Election?", said he based his political predictions on analyses of the speech and body movements of Ma, Hsieh and other major candidates. He said he had personally advised Taiwanese politicians from both major parties, though he would not reveal any names.

Taiwanese politicians seem especially superstitious these days, he said. "Taiwan is in a state of confusion," he said in a telephone interview.

He predicted difficulties ahead for Ma, in part because the Kuomintang candidate throws his left leg too far forward when he walks.

The fortuneteller So Man Fung, based in Hong Kong, has also entered the game. Last year he predicted that Ma would survive a scandal over alleged misuse of his expense accounts as mayor of Taipei. (That proved accurate; last month Ma was cleared of all wrongdoing.)

But Lee Lichang, a sociologist at National Kaohsiung University of Applied Sciences, said fortunetellers had displayed just as much partisan bias as newspaper polls: fortunetellers from Hong Kong tend to lean toward Ma, he said, while fortunetellers in southern Taiwan tend to favor Hsieh.

Which could explain why some Taiwanese have looked farther afield for a reliable prognosticator.

This week, the news media focused on Elizabeth Fotinopoulos, a psychic from Huntington Station, New York, who is visiting Taiwan on a book-promotion tour ("Your Hidden Truth"). Her verdict: Ma's life is in danger, and Hsieh should also be careful about his health.

For all their willingness to comment on current politics, few fortunetellers seem willing to say outright who will win. That task falls to a less mystical source: a Chinese-language prediction market, set up in Taiwan in 2006.

Such markets have gained popularity in the United States and Europe, where they have been used to forecast everything from elections to soccer results to the severity of the winter flu season. They gained notoriety in 2003 when a public outcry led to the shutdown of a Pentagon-backed market for predicting terrorist attacks.

In the election market established by Taiwan's Center for Prediction Markets, participants register and receive a pot of 100,000 virtual points. They can then begin trading in "contracts," on whether a certain candidate will win the election, or on the candidate's final share of the vote.
The market now boasts a couple thousand traders from Taiwan, Hong Kong, mainland China and across the globe.

"In the U.S. it's becoming more and more a mainstream thing, but it's still a new concept in Asia," said Liu Chia-kai, president of Swarchy, a private company collaborating on the project.

The Taiwanese version already passed one test in December 2006. Then, markets for the Taipei and Kaohsiung mayoral elections beat publicly released opinion polls in predicting vote shares.

So how is the market calling the big election in March?

Ma's lead is more commanding than in the newspaper polls, with his "contract" stabilizing at $70 to $75 since early December. Hsieh's is trading under $30.

Still, there's plenty of time for the market - and the fortunetellers, feng shui masters and gods - to change their predictions.

Ko Shu-ling contributed reporting from Taipei.

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