Meet China's dolphin tribe

Analysis: Inflation, hoarding, hot money — why the "currency wars" will only get worse.

TAIPEI, Taiwan — They're called the "dolphin tribe," a pun on the Mandarin word for "hoarding."

They're an example of how a weaker U.S. dollar is starting to affect everyday lives in China and across east Asia — and why, even as Asia-Pacific leaders meet in Yokohama to hash out a free trade agreement, the "currency wars" have only just begun.

"Dolphin tribe" (haitunzu) is one of the latest buzzwords on the Chinese-language internet, and it refers to Chinese who have begun hoarding everyday goods on expectations of more price hikes.

Ms. Zhang, from the southern metropolis Guangzhou, told China's Southern Daily that hoarding had become an obsession, and she's even snatching up makeup and towels. "I'm hoarding everything I use — I've become a 'dolphin'," she told the paper.

It's not just hysteria. China just shocked analysts by posting 4.4 percent rate of inflation in October, far higher than expected — and some economists are now saying the rate could soon hit 6 percent. According to the Southern Daily, prices at Guangzhou supermarkets are soaring: cooking oil shot up 15 percent in late October; sugar, 13 percent, ditto garlic, ginger, apples and rice wine.

Why the sharp rise in prices? One of the reasons, explains Taiwan finance expert Norman Yin, is the weak dollar. "When the U.S. dollar is going down, people holding U.S. dollars dump them to buy other things to secure value, so it pushes everything up," said Yin. "So the price of imported goods and all kinds of materials is soaring."

Commodity prices are also sharply up in Taiwan, prompting the government to slash tariffs on key imports like corn flour, soybean flour and cane sugar to ease the burden on consumers.

Now, central banks in both Beijing and Taipei are expected to hike interest rates as they pivot from stimulating the economy to taming inflation. Expectation of those hikes from China — possibly over the weekend — sent commodities tumbling Friday, a sign of markets' ultra-sensitivity.

But hiking rates is likely to worsen another long-standing problem: hot money inflows. "Hot money" refers to short-term speculators looking to turn a quick buck on the currency or another craze du jour — be it New Taiwan dollars, South Korean won or Indonesian rupiah. Such investors are basically turning East Asian currency markets into casinos, pumping in funds by the billion only to dump the local currency when they think it has peaked.

According to one Chinese official, there's now $10 trillion — that's trillion with a 't' — in "hot money" sloshing around the globe, looking for easy returns. Buying in mass amounts creates self-fulfilling prophecies: whatever the hot money thinks will go up, usually does.

But exporting countries don't want their currencies to climb too much, because that makes their goods pricier abroad, and so slows business, sags economies and kills jobs. To keep their currencies from spiking up and then cratering like Pets.com stock circa 2000, China's central banks and others engage in massive interventions. Basically, they're sopping up all the "hot money" to keep their currency stable.

Now, the U.S. Federal Reserve has just made their job that much more difficult — turning the headache of "hot money" into a serious migraine. From East Asia's perspective, the $600 billion "QE2" injection plan has sent a tsunami of new "hot money" rolling toward their shores.

"The U.S. is trying to boost domestic demand in America, but that money will go abroad instead of staying in the U.S.," said Yin. "So it causes problems. When it goes abroad, it just pushes the U.S. dollar's value further down, and then it triggers a currency war."

Yin says Washington may not mean badly, it just don't "give a damn" about what QE2 will mean for China or other Asia exporters. "Americans aren't really taught to see this kind of thing as a concern," said Yin. "But for us, if there is such a large quantity of money flowing in in a very short period, then it really causes a lot of trouble, because most Asian countries have quite shallow financial markets."

"Hot money" inflows account for about 20 percent of China's accumulated reserves, says Yin; some economists say much more. And it's not just China; Japan, South Korea and Taiwan are also struggling to sponge up hot money inflows and hold down currency values. Yin said hot money began surging into Taiwan's currency market at $1 billion a day starting in mid-September when QE2 was first signaled, at least twice the typical daily flows before. It's coming in at $1.5 billion a day now.

"The four central banks are very busy in dealing with hot money from abroad, and they'll use every means," said Yin.

That means loading up their weapons of mass intervention. In Taiwan, sipping coffee with foreign bankers and hinting politely that maybe they should lay off the NT dollar didn't work so well (they called it "moral suasion.") So Taiwan's central bank is now selling massive amounts of Taiwan dollars toward the end of daily trading sessions to keep the currency down, adding steadily to its more than $380 billion pile of foreign exchange reserves — the world's fourth-largest reserves after China's, Japan's and Russia's.

Taiwan and South Korea are also dabbling with capital controls; changing rules to discourage short-term speculators. Japan is ready to sell massive amounts of yen into the market to keep down its value.

And China will continue to do the same with its own currency, the yuan. In fact, its intervention is only likely to increase, and its reserves balloon more (they're now a cool $2.65 trillion), as higher interest rates attract even more hot money.

That means despite what Obama and his "dogs" at the IMF may say (see Next Media Animation rap below), China's not likely to throw Washington a bone on the value of the yuan.

Economist Andy Xie is downright alarmist, writing in a recent commentary in China International Business that tit-for-tat attempts to drive down currency values are wreaking havoc on the global economy.

"If you print a trillion, I'll print a trillion. No change in exchange rate after a trillion? Let's do it again, QE2," writes Xie. "The world is heading towards high inflation and political instability. It's only a matter of time before there is another global crisis."

Think we're in a currency war? The dolphin tribe's rise is a sign you ain't seen nothin' yet.

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More than just business

Cross-strait banking: More than just business

Taiwan and China may have different motivations, but they both wind up at the bank.

October 10, 2010 TAIPEI, Taiwan — After years of waiting, Taiwan banks finally have a shot at the mainland Chinese market.

In the last year the two sides agreed on mutual market access for each others' banks — and Taiwan's first branches in the mainland could open up by year's end.

But bank officials and analysts here are surprisingly cautious about what comes next — and many are downplaying expectations.

Their skepticism reflects the complicated dynamics of cross-strait relations, in which business and politics are inescapably linked.

The story of cross-strait banking opening is just one example of a larger contradiction. Taiwan's motivation is money — it wants access to the lucrative China market. But China's motivation is strategic. It hopes closer economic ties will lead to political unification, Beijing's long-cherished dream.

Opening the mainland market to Taiwan banks is just another carrot meant to boost China's economic sway over the island, say analysts. And with a China-friendly president now in power in Taiwan, the carrots are coming fast and furious.

"Because of the cross-strait relationship, the Chinese right now are trying very hard to please Taiwan, and be friendly toward Taiwanese," said Norman Yin, a finance expert at Taiwan's National Chengchi University.

The question is, given the two sides' sharply different dreams, how long can the good feelings last? For skeptics, China's track record isn't encouraging. China's recent, de facto ban on rare earths exports to Japan during a spat between the two countries showed how quick it can be to use its business clout for political ends.

And there's a recent example from Taiwan, too. When pro-independence politicians in southern Taiwan invited the Dalai Lama to tour disaster-hit areas after a 2009 typhoon, Chinese tour groups reportedly canceled trips to southern Taiwan, though it was unclear if this was under Beijing's orders or not. China reviles the Tibetan spiritual leader as a "splittist" and loudly complains to any governments willing to host or meet him.

Tough regulatory landscape

Politics aside, China has a highly-regulated banking market that ultimately answers to the guidance of the state. China's four big state-run banks are run not as commercial enterprises but, first and foremost, as strategic economic entities tasked with helping drive China's development.

"The other issue is the government," said JP Morgan's Taiwan banking analyst Dexter Hsu, commenting on Taiwan banks' prospects in the mainland. "China is highly regulated, so you don't know how many benefits they will give us."

So far, big foreign banks appear to be finding this out the hard way. A recent report from accounting firm KPMG, reported recently by the Wall Street Journal, found that big foreign banks' profits had tumbled in 2009, while China's state-run banks had a banner year.

The Journal explained that foreign banks' mainland units had stricter self-imposed lending limits, while China's state-run banks were all too eager to dole out cash. Some regulations sharply limit what foreign banks can do, such as a $1 million renminbi ($150,000) minimum deposit requirement for foreign banks customers' that effectively bars foreign firms from extensive retail banking in China.

In the past two years Taiwan has negotiated a better deal for its banks' mainland operations, compared to foreign banks like HSBC or Citibank. But it will still face the $1 million RMB deposit requirement (Taiwan's banking regulator says it's talking to China to try to change that). And average Chinese will likely be all too aware of the political risks of stashing their money in a Taiwan bank, analysts say.

"If you are Chinese, why would you go to Chinatrust [a large Taiwan bank] branches?" said Pandora Lee, a Taiwan banking analyst for investment house UBS. "You probably wouldn't trust them."

Greener pastures

Still, all that's not stopping Taiwan banks from piling into China. For one thing, they don't have many other options for finding new business. As with many markets in Taiwan, the island's banking market is overcrowded and hyper-competitive.

"There are too many banks, and too few customers [in Taiwan]," said UBS' Lee. "Large Taiwan corporations and SMEs [small and medium enterprises] have moved to China. You can reduce the number of players through consolidation, but the government is not going to push for consolidation because that will mean layoffs — and there are too many elections."

"So the only solution is to move to a new market where you have growth," she said.

Taiwan banks' returns on equity — a common measure of a bank's profitability — are around 2 percent to 5 percent, while ROEs in the mainland top 20 percent, according to Yin, the finance expert. "That's why Taiwan banks are looking at China — it's a big pie over there," said Yin. "It's very profitable in that market."

So far, four Taiwan banks have been cleared to open branches in China. A few more are waiting in the wings. Meanwhile, two of China's state-run banks have been approved to open offices in Taiwan. Their presence will be mostly symbolic, since they can hardly expect to make much money in Taiwan's saturated market.

Well aware of the many challenges in mainland China, Taiwan's banks are starting easy, with the customers they already know — Taiwan businesses operating in the mainland, also called "taishang." Such firms helped kick-start China's export miracle, and punch far above their weight in contract electronics manufacturing and some other sectors.

By one Taiwan government estimate, Taiwanese have invested a cumulative total of $150 billion in China since the early 1990s. Taiwan's Mainland Affairs Council doesn't keep official statistics on the Taiwanese presence in China, but rough estimates range from 100,000 to 150,000 Taiwan firms doing business there.

Taiwan's banks will first go after the taishang market, estimated by UBS at $56 billion. "Their target customers are Taiwanese businessmen," said Yin. "And then after they secure this market, then they will try to get into the local market in China."

UBS thinks Taiwan could snatch up to a third of that market, with Chinese banks and foreign banks keeping the rest.

That's a tiny drop in the bucket compared to China's overall banking market, which includes a staggering $7 trillion in loans and $10 trillion in deposits. But for Taiwan's small banks, the extra business matters. "For them it's peanuts, but for us it's big — it could have a huge impact on Taiwan," said JP Morgan's Hsu.

Provided, of course, that politics doesn't get in the way.

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The yuan diaries

Analysis: Your guide to understanding the yuan-dollar currency spat

Global Post, April 13, 2010

TAIPEI, TAIWAN -- To get the scoop on China's currency, follow the "hot" money.

So says Shanghai-based independent economist Andy Xie, a highly regarded maverick who used to be Morgan Stanley's chief Asia economist.

Economists like Xie are locked in a fierce debate over the simple question: is the Chinese currency too cheap?

"Hot money" — or speculative foreign money — is the key to the answer, he says.

It's not just an academic tiff. If the currency is too cheap, that means Chinese imports are too cheap on Wal-Mart shelves. That's unfair to competing U.S. firms and means, politically speaking, China's a bad guy.

If the currency is fairly valued, that means Chinese goods at Wal-Mart are fairly valued, too. U.S. firms are just whining and should suck it up. All's fair in love and globalization. By this reasoning, China's just a savvy business rival.

U.S. political pressure was pushing the White House toward the first conclusion. It was about to label China a currency "manipulator" (read: a really bad guy.) But diplomacy appears to have won the day; a decision on that was postponed, and China in turn has hinted it will let its currency rise, at least by an itty-bit. The yuan-dollar level was on the table again Monday, when President Barack Obama met with Chinese President Hu Jintao in Washington.

That's not likely to end the economists' debate, though. To understand that, we first have to unpack a few suitcases of financial jargon.

For those who don't speak "Forex," here's the situation, as explained patiently by Nicholas Lardy, one of America's top go-to guys on China's financial system.

China usually sells a lot more stuff to America than it buys from America. China sells stuff for dollars and buys stuff with China's currency, the yuan or renminbi. That means China's firms end up with way more dollars than yuan. Follow?

The problem is, Chinese firms need yuan to pay their employees and suppliers and buy materials. So what do they do?

They go to China's currency market and swap their dollars for yuan. That creates a lot of demand for yuan. If you remember your Econ 101, a lot of demand should push up the price of the yuan, given a steady supply. In finance-speak, the yuan should "appreciate."

Here's where China's government intervenes. It pumps in extra supply of yuan and sells to all comers, at a roughly set price of 6.8 to the dollar, or about one yuan for 15 cents. "The natural tendency would be for the renminbi to rise," says Lardy. "The government doesn't want that to happen, so it steps into the market and sells the renminbi to keep its value low."

In doing so, China's government collects massive amounts of dollars, mostly U.S. Treasuries, to be more specific. Voila, China's ballooning "foreign reserves," which you've heard so much about. (Beijing's stash is now worth about $2.4 trillion, with $450 billion tucked away in 2009 alone.)

Now back to the debate. Wang Tao, the Beijing-based head of China economic research at investment house UBS, says the fact that China has to sell huge amounts of yuan every day means it's obviously too cheap. If China's central bank overslept one day, the market would drive the value of the yuan higher.

Sounds like an open and shut case. China is creating artificial supply to keep its yuan cheap and so help its exporters. "If the central bank was not buying forex day in and day out, the currency would have appreciated," says Wang.

But here's the catch, counters Xie: A big part of the demand for yuan is artificial, too — that's the "hot money."

Foreign speculators are betting the yuan is going to rise like Amazon.com stock in the 1990s. So they're rushing into China to buy the yuan at 15 cents a pop, hoping to sell it later when the price is, say, 17 cents, pocketing two cents per yuan profit. Sounds like chump change, but it adds up if you're swapping large amounts.

Meanwhile, speculators are parking their yuan in Chinese property. That's driving a massive property bubble, particularly in places like Shanghai. The country's in the grip of a speculative "mania," warns Xie, and "the day of reckoning will come."

He thinks "hot money" accounts for fully half of China's accumulated reserves.

UBS' Wang isn't as worried. She admits some speculators have bet on the yuan, especially since 2007. But she says China still keeps close tabs over foreign money flows, and has many controls. "It's not so easy to get in and out," she says.

That means small speculators may be able to move money back to the home country. But big institutional investors that could really distort China's currency market can't move money in and out of China the way they can in some other countries, says Wang.

Her investment house's latest estimate is that "hot money" accounts for less than 20 percent of China's accumulated reserves, or $480 billion at most.

So who's right?

Ask your nearest economist. And expect to hear three different answers.

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Is the yuan too pricey?

The value of China's currency, the yuan, is one of the most hotly contested issues in US-China relations. The US says a high yuan is costing American jobs. But it also keeps consumer items, like TVs and computers, inexpensive. Will China soon adjust the value of its currency?

Christian Science Monitor, April 13, 2010

Washington agreed to postpone releasing a report that would have labeled China a currency manipulator. On Monday, Chinese Premier Hu Jintao and President Obama spent little time discussing this source of ongoing tension in US-China relations. Many analysts suspect that China will soon quietly adjust the value of its currency, the yuan.

Here's a short Q&A on this complex issue:

How does the value of China's currency affect the average American?

The value of China's currency, the yuan or renminbi, affects the price of Chinese-made goods sold in the United States by retail stores such as Wal-Mart.

A cheap yuan makes Chinese products cheaper in the US. A stronger yuan would make TVs, computers, and other things made in China more expensive for American consumers.

Goods from China now make up nearly 20 percent of America's imports. In 2009, top imports from China included electrical equipment, apparel, toys and games, and furniture.

But US manufacturers are hurt by a cheap yuan. They say Chinese goods are sold at a sharp "discount" in the US. For example, a Chinese-made chair should sell for $100 in the US if the yuan was fairly valued, but now sells for $75, they say – undercutting American competitors, and thereby costing American jobs.

Is China's yuan really undervalued?

Most economists say, "yes." As evidence, they point to China's massive foreign-exchange reserves and its huge trade surplus.

The rapid growth in China's foreign-exchange reserves means China's central bank has bought huge numbers of US Treasury notes and other foreign currencies to keep down the value of the yuan. Last year alone China's foreign reserves increased by $450 billion, to total $2.4 trillion.

China's trade surplus means it's selling the world far more stuff than it's buying. Some observers look at that growing gap and infer that Chinese goods are too cheap abroad – and therefore, that the yuan is also too cheap.

The International Monetary Fund has also said that China's yuan is undervalued.

But a few prominent economists dispute this notion. They include Goldman Sachs's chief economist, Jim O'Neill, and Shanghai-based independent economist, Andy Xie. Mr. Xie says it's wrong to conclude from China's trade surplus that the yuan is undervalued. And he says China's yuan may even be overvalued due to speculative "hot money" that's fueling a property bubble in China and putting sharp upward pressure on its currency.

"China is in a huge mania," says Xie. "The No. 1 issue isn't the exchange rate, it's financial mania."

But don't market forces determine currency value?

China's currency markets are not free or completely open. China's central bank intervenes in its currency market to control the value of the yuan.

Here's how it works: Chinese exporters accumulate US dollars or other currencies from foreign customers. However, they need to pay their Chinese employees and suppliers in yuan.

Chinese exporters go to China's currency market to swap their dollars for yuan. With thousands of firms doing this, the demand for yuan is high. In a free currency market, this would push up the price of the yuan as demand outpaces supply.

To prevent that from happening, China's central bank increases the market supply of yuan. It sells as many extra yuan as the market wants, targeting a rate of around 6.83 to the US dollar.

"It's a massive operation," says Nicholas Lardy, a top expert on China's economy at the Peterson Institute for International Economics in Washington, D.C. "For a big economy like China's, the scale of intervention in the market is without precedent in global history."

Why is China keeping its currency undervalued?

The short answer is that it keeps Chinese exports cheap. That helps Chinese firms make money and keeps China's export-driven factories humming. A cheap yuan also means political stability in a nation where tens of millions of Chinese peasants need jobs.

Economists say China didn't necessarily set out with the goal of a cheap yuan. In the late 1990s, the yuan was pegged to the US dollar at about 8.28 to 1. No one complained then, Mr. Lardy says, because the US dollar was strengthening.

The problems started around 2001, he says, when the US dollar weakened and took the yuan with it. The US and other trading partners watched with concern as China's trade surplus grew and its foreign-exchange reserves ballooned.

By that time, a powerful interest group had formed in China in support of a cheap yuan. This group included big exporters and politicians in China's coastal provinces, Lardy says. China's currency policy fueled export sales, and kept the money rolling in and the economy booming in those regions.

The US has been pushing China to revalue the yuan for years. When might China change its policy?

China has already changed its currency policy once before. In 2005, after a few years of pressure, it allowed the yuan to begin appreciating slowly. (Policy wonks call this a "managed float" policy.) From then until 2008, the yuan quietly gained more than 20 percent against the dollar.

China stopped doing this when the global economic downturn hit. It returned to a de facto peg to the US dollar. It did this to protect its exporters and ensure economic stability amid tough global conditions.

Now, economists say Beijing is waiting for clearer signs of a strong global recovery before going back to the "managed float" policy.

Lardy expects that China may begin allowing the yuan to appreciate against the dollar "in the next few weeks," and that we could see a 4 to 6 percent appreciation against the dollar by the end of the year.

"There are a lot of good domestic reasons for China to allow the renminbi to appreciate," says Lardy, including fighting inflation and helping create more service-sector jobs.

Xie also thinks Beijing may allow the yuan to appreciate this year, but only by a small amount. "China will not be able to make a change big enough to make Americans happy – it's impossible," Xie says.

Original site

China, Taiwan ink MOUs

A small step to bridging the Taiwan Strait

New York Times, November 18, 2009

Taipei, Taiwan -- Once China and Taiwan had agreed on the substance of the financial cooperation deal they signed this week, they still had a few details to decide: Where should they sign the pact, what names should they use to sign it, and which Chinese script should they write in?

Despite the warming trend in cross-relations, neither government officially recognizes the other. Neither wants to be seen playing second fiddle. And each insists on using its own Chinese characters — “traditional” ones for Taiwan and “simplified” script for China.

The solution the two sides arrived at was a model of diplomatic sleight of hand. The documents (three, covering banking, insurance and securities) would be signed “the Taiwan side” and “the mainland side.” Taiwan prepared a traditional Chinese version, Beijing prepared one in simplified characters.

On Monday, envoys from the two sides delivered their versions to the top financial regulators on the other side. Then, in their respective capitals, each side signed the other’s version, sealing the deal.

“We didn’t mention any official agency’s name, or use official titles,” said James Chang of the department of international affairs at the Financial Supervisory Commission, the Taiwanese regulator responsible for negotiating and signing Monday’s deal. “If we don’t need to discuss where to sign, it’s much easier for us,” he added. “We just avoided these political disputes.”

Analysts say the deal, while welcomed by financial firms and investors, is one more small step on the difficult path toward economic normalization. Many details must be ironed out. As Taiwan and China pursue ever-closer commercial relations, the elaborate signing procedure on Monday left some Taiwanese wondering whether they were slowly forfeiting their sovereignty.

“The way they signed the agreement was very significant politically,” said Tao Yi-feng, a political science professor at National Taiwan University who has researched cross-strait banking. While past agreements were handled by semiofficial organizations, this one was negotiated directly by government departments from each side, she said.

That means, she said, the deal “embodies the concept of ‘one country, two districts,’ ” — in line with Beijing’s insistence that Taiwan is part of “one China.”

“It sets up a formula for future agreements that I don’t think is so good for Taiwan,” she added. “I think it damages” Taiwanese sovereignty.

The deal includes three memorandums of understanding on financial ties. The statements cover information-sharing, inspections, protection of information and crisis management — in the event, for example, that a financial institution with interests on the other side of the strait goes bankrupt.

The most anticipated deal was on banking. Taiwanese banks have long yearned to do business on the mainland, where about one million Taiwanese live and work, and where Taiwanese firms have invested at least $150 billion, according to Taiwan government estimates. But until now, Taiwanese banks have been allowed to set up only representative offices that cannot do business.

After the new deal takes effect in January, Taiwanese banks like Mega Financial Holding and Cathay Financial Holding will eventually be able to upgrade those offices into branches, allowing them to lend to Taiwanese firms on the mainland and do other business, according to Taiwan’s Financial Supervisory Commission.

But restrictions remain. The agreement “is a precondition for the banks on two sides to set up a branch on the other side,” Ms. Tao said. “But how many they can set up and under what condition and terms will have to be determined in future negotiations.”

Grace Lin, a spokeswoman for Mega Financial, which opened a representative office in Suzhou, China, this year, said regulations still prevented them from upgrading to a branch until three years after the opening of the representative office. After that, the bank would have to wait until 2015 before it can do business in renminbi, the Chinese currency.

Ms. Lin said Taiwanese banks hoped to speed up that timetable in talks next month on an Economic Cooperation Framework Agreement. It could give Taiwanese banks a shortcut through China’s rules for non-mainland institutions. “For us, the M.O.U. was a very positive signal, but we can’t get any real benefits yet,” Ms. Lin said.

Analysts were cautious, too. The deal “will be long-term structurally positive to Taiwan’s financial sector, but material earnings impact will not arrive overnight,” Deutsche Bank wrote in a note released this week.

The memorandum of understanding on securities was also relatively narrow. It paves the way for securities firms to open branches on the opposite side of the strait. And it will permit China’s qualified domestic institutional investors to invest in Taiwanese stocks, bonds and futures, according to the island’s Financial Supervisory Commission. But it’s up to the investors whether they’ll do so, the commission said.

The agreement on insurance was mostly symbolic, and the two sides have not discussed market access, Mr. Chang said. He said there were many issues in this realm, including China’s World Trade Organization commitments. “If they offer special treatment to us, it will cause some problems for them, because the U.S. and E.U. will ask them to offer the same treatment.” Insurance firms will have to wait for more talks.

That trade deal would lower cross-strait tariffs across sectors, including petrochemicals. But the island’s independence-leaning opposition has kept up a drumbeat of criticism, saying the government of President Ma Ying-jeou is trying to ram through such deals without consulting the legislature or the public.

Opposition politicians called the Monday deal a “lightning” signing that “tricked” the legislature, saying the government reported the agreement to the legislature only a few hours before signing it, and that opposition legislators had not seen its contents.

“We believe that when signing such an important agreement, the government shouldn’t use this kind of sneaky and nontransparent method,” an opposition party statement said. “Otherwise the public won’t be able to have confidence in the government’s negotiations, and in whether it’s really safeguarding the national interest.’

The Taiwanese government has said it does not need legislative approval for most cross-strait deals. But it has agreed to seek such approval before signing a broader trade deal with Beijing, which it hopes to do next year.

The opposition doesn’t hold enough seats in the legislature to block a trade deal. But it could slow down further deals with protests on the legislative floor and in the streets.

The next opportunity: the fourth round of semiofficial cross-strait talks, slated for next month in Taichung, Taiwan.

The recent pace of cross-strait deal-making since Mr. Ma took office last year has left some Taiwanese uncomfortable.

“Some fear that further integration might be used as a weapon to blackmail Taiwan,” said Shih Cheng-feng, a political commentator from National Dong Hwa University in Hualien, Taiwan.

“We talk about a free trade area, the exchange of goods, now capital — what’s the next step?” said Mr. Shih. “Maybe free flow of labor. It’s one more step into the trap of dependency.”

Original site

Will red money tame Taiwan?

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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Bulls run in Taiwan

Exuberance in Taiwan as Ties With China Warm

New York Times, May 13, 2009

TAIPEI — The bulls are running hard in Taiwan as the island prepares to open its doors to mainland Chinese investment for the first time since breaking from Beijing in 1949.

After the two sides announced plans late last month to sign accords on banking, insurance and access to financial markets, mainland fever has set in on the island: its benchmark stock index, the Taiex, climbed 13 percent in the two weeks to Friday, and some analysts are predicting an additional gain of 25 percent to 50 percent by year-end. The Taiwan dollar has strengthened 2.5 percent.

Optimists see decades of bitter rivalry across the Taiwan Strait fading. The British bank Standard Chartered has dubbed the opening a “great leap across the strait,” and Goldman Sachs has called it a “paradigm shift.”

But others here are cautioning that the opening to mainland money could take longer than expected — and that in the near future at least, mainland investors will face a daunting maze of regulatory approvals and political concerns.

“People are overoptimistic,” said Norman Yin, a finance expert and informal economic adviser to Taiwan’s president. “They don’t understand that there are many constraints in the first stage. And in sensitive sectors, such as high-tech, military-related or mobile phones, there will be even more restrictions.”

Beijing officials have viewed Taiwan as a renegade province ever since the Nationalists retreated to the island when they lost the Chinese Civil War to the Communists 60 years ago. Though not formally independent, the island has had its own government, economy and currency.

For most of this decade, Taiwan was led by a pro-independence government that increased some cross-strait ties, although not nearly as quickly or broadly as business interests and investors would have liked.

But since Ma Ying-jeou was inaugurated as president nearly a year ago, Taiwan has moved rapidly to forge closer commercial links with China to lift its sagging economy. In the past year, it signed deals with China on tourism, airline flights and shipping.

Investment, however, has remained a one-way street, flowing from the island to the mainland. Taiwan has invested $150 billion in the mainland since the 1980s, according to one Taiwan government estimate. Mainland China has until now been barred from directly investing in Taiwan.

Now, analysts are heralding the long-term financial implications of Taiwan’s opening to the mainland. The anticipation began on April 26, when officials from Taipei and Beijing met in the mainland city of Nanjing and signed a statement on financial cooperation.

Three days later, Taiwan said it would allow mainland investment in nearly 100 sectors. Taipei also said it would permit mainland investment in construction projects that are part of Mr. Ma’s economic stimulus package. The same day, the first possible deal was announced. China Mobile, which has the most subscribers of any mobile phone carrier, said it had agreed to take a 12 percent stake in Far EasTone Telecommunications of Taiwan.

On May 1, China formally approved Taiwan-bound investment by qualified domestic institutional investors. Four days later, it announced a plan to step up development of a cross-strait economic zone in Fujian Province. Taiwanese auto, banking and other companies added to the euphoria by announcing investment tie-up plans with mainland companies.

The response to all this has been a stock market frenzy, especially by foreign institutional investors. JPMorgan Chase announced a target of 8,000 for the Taiex by year-end (the Taiex closed at 6,485 on Wednesday).

Goldman Sachs upgraded Taiwan shares in general to “overweight” this month. “The rapidity and scope of recent cross-strait initiatives,” it said in a note, “are welcome signals that Taiwan may finally reap the economic benefits from a warmer relationship with China.”

But many investors seem to have glossed over or willfully ignored the fact that many essential details remain unresolved or undisclosed. For one, the details of which specific sectors will be open to mainland money have not been completed.

Taiwan will most likely allow mainland investment in 98 industries during the first phase, including automobiles, textiles, rubber and retailing, with detailed rules probably coming at month-end, the Taiwan minister of economic affairs, Yiin Chii-ming told reporters this week. But flat-panel and contract-chip manufacturing will still be shut to mainland investors for now.

Then, the two sides will have to sign a memorandum of understanding, probably in June or July for stock investments, as well as separate agreements for banking and insurance.

“On the Taiwan side, the government is still keeping their cards close to their chest,” said Tony Phoo, an economist with Standard Chartered. “We still don’t have details on everything we’re hearing and reading about, so there’s a lot of market speculation.”

Kevin Yang, chief investment officer at Paradigm Asset Management, added that for now, Beijing was capping Taiwan-bound investment at about 7.2 billion Taiwan dollars, or about $219 million.

“That’s very little,” he said. “I think the market’s overreacting.”

Phil Chu of Grand Cathay Securities and other analysts say foreign investors are betting that Taiwan will be another Hong Kong, where the stock market boomed following its opening to mainland investment. “I think it’s possible Taiwan’s stock market could double by 2012,” Mr. Chu said. “But it won’t go up as much as Hong Kong’s did.”

Still, analysts see Taiwan’s opening to the mainland as helping the island’s economic recovery in the short-term, and providing a structural boost in the long-run. China has already played a part in lifting some sectors. Its rural stimulus plan has increased mainland demand for televisions and other appliances, which has increased orders for Taiwan’s high technology companies.

Investors in Taiwan’s market have been burned before on inflated mainland hopes. Last year, for example, the market rocketed in the two months before Mr. Ma’s inauguration, only to plunge steadily afterward as the reality of the global downturn set in. Still, analysts insist that the long-term picture is bright.

“For eight years, Taiwan kept limits on exchanges and investments,” Mr. Chu said. “But since last year, Ma Ying-jeou has steadily adopted opening policies.”

Original site

Don't Bank On It

Scandal highlights banking sector's woes

Jonathan Adams

Asia Times, January 18, 2007

The latest financial scandal to rock Taiwan - and one of its biggest in recent years - has shown that despite much talk of reforming the banking sector, the island still has a long way to go.

The "financial storm", as Taiwan's media call it, began early this month when two subsidiaries of the Rebar Asia Pacific Group announced they had filed for insolvency. That led to a run on the Chinese Bank, a member of the Rebar group, on January 5.

The government quickly moved to take over that and another Rebar firm to calm panicked customers. Then it emerged that the chairman of Rebar had fled to China late last month, and was reportedly holed up in a Shanghai luxury hotel with his wife.

Last week saw an around-the-clock media frenzy as the chairman's relatives were hauled in for questioning, regulators scurried to contain the fallout, the head of the nation's financial watchdog stepped down, and politicians began pointing fingers over who else might be to blame.

Most analysts said the bank run would not impact the larger banking industry, Asia's fourth-largest. But it's just the latest in a series of troubles to plague the overcrowded sector.

Taiwanese banks remain frozen out of the mainland China market by the cross-strait political impasse. Meanwhile, plans to consolidate and reform the financial sector have stalled. The government hoped foreign investors would help shake up the industry by buying stakes in local banks, but so far such activity has been limited.

Now, the Rebar fiasco has highlighted some of the sector's dubious lending practices, and the need for better oversight of the island's financial firms.

"The run on the Chinese Bank is just a symptom of a larger issue, which is how do we deal with the banking sector?" said Chen Ming-chi, with the Institute of Sociology at Taiwan's National Tsing Hua University.

Dealing with it correctly has broad implications for the island's future. Taiwan is now a services-based economy (services account for more than 70% of gross domestic product and most of the island's jobs), which means further productivity gains and development depend on improvements in key service sectors such as banking and finance.

For several years, industry analysts have sent a blunt message: give Taiwan's banks an extreme makeover, or risk losing long-term competitiveness and becoming even more sidelined from regional economic integration.

"Without access to China in the medium term, the banking sector is structurally moribund," wrote consultancy Macquarie Research in a note last year. "We need the structure of the operating environment to change."

Access to mainland China appears to be off the table at least until May 2008, when a new president will take power in Taiwan.

The island's government bars its banks from providing anything more than consulting services in the mainland. The opposition sponsored a bill to change this last year, but it has gone nowhere, said Christina Liu, an opposition legislator and finance professor at both Taipei's National Taiwan University and Beijing's Tsinghua University.

She said that days after the bill passed its first reading in Taiwan's legislature, Beijing made it clear that it would only allow Taiwanese banks to open shop in the mainland if a cross-strait memorandum of understanding were inked.

The condition of such a memorandum is Taiwan's acceptance of the "one China" principle - a non-starter for the current independence-leaning government.

That roadblock has some Taiwanese tearing their hair out over lost opportunities. Taiwanese banks would seem to have distinct advantages in the China market, with their shared language and ties - particularly in commercially vibrant southern coastal provinces such as Fujian, which is the closest culturally to Taiwan. And they have a built-in customer base of Taiwanese living and working in the mainland.

But with Taipei-Beijing relations still frosty, the island's banks are left to gaze wistfully across the strait, as the big foreign players such as HSBC and Citibank get a rapidly growing head-start in the land grab in China.

"Taiwanese banks are stuck here - they can't do any business in mainland China," said Liu. "It's really a shame, because we [could] have so many customers there."

With the door to the mainland bolted shut for now, that leaves mergers and acquisitions as the way forward for the industry. Consultants have long bemoaned Taiwan's packed banking sector, which included more than 50 firms in 2000, serving only 23 million people.

In a 2005 report, the consultancy McKinsey argued that an ideal number would be about 15 at most, including one or two "regional champions" that would have the scale to compete in the mainland Chinese market. It urged Taiwan to follow South Korea's example and push ahead with the politically tough task of sweeping banking reforms - and to avoid Japan's example of merely "stapling" together bad banks to create bigger, but not necessarily better, players.

"Both industry and government could continue to pursue their incremental approach and hope the competitiveness of the financial sector and broader economy does not further erode," wrote McKinsey. "Or they could take bold steps to change the rules of the game and put Taiwan back on the Asian banking map."

The incremental approach appears to have won the day. The current administration has talked up consolidation and established ambitious goals, but the results have been modest.

Holding companies formed to spur consolidation have not performed as well as hoped. Taiwan now has 43 banks, with other mergers and privatization plans for state-run banks stalled.

Meanwhile, the government has worked to attract foreign interest in the sector, sending road shows abroad to lure big financial players into buying stakes. That campaign has had some success: last year several foreign firms bought stakes in Taiwanese banks, including Standard Chartered's bid for a controlling stake in Hsinchu International Bank.

But a more recent deal, Citibank's reported talks to acquire a stake of the Bank of Overseas Chinese (BOOC), have foundered amid vocal opposition from the bank's union leaders. And analysts don't expect many more such deals: both Hsinchu and BOOC are small banks, while the larger state-run banks are seen as less attractive targets.

All of this leaves many less than impressed with the government's reform efforts.

"Our government puts very strict limits on investment in China, while encouraging banks to merge and attract foreign investment as a substitute for going to China," said National Tsing Hua University's Chen. "I don't think the government formula can sustain itself, and it's not good for the banking sector. As long as there are limits on going to China, I think the problem will still be there."

Still, some see a silver lining in the cloud over Taiwan's banks. Wu Chung-shu, a research fellow at the Academia Sinica's Institute of Economics in Taipei, says the worst may be over for the industry.

It has rebounded from a credit bubble in 2005 and early last year, and its bad-loan ratio has come down from more than 8% in 2002 to just over 2% now. Now, Wu says the Rebar crisis will prompt the government to crack down harder on shaky firms.

"Rebar will push the government to deal with under performing banking companies by telling them to get out of the market or merge with other firms," Wu said. "You're going to see more consolidation in the banking and insurance industries. But the number of banks is not the main issue; it's how to get these banks to operate in a more efficient way."

Figuring out how to do that will be one of the most pressing questions for Taiwan's government in the coming years.

Original site

The Missing Link

Big banks eye Taiwan's finance market

Jonathan Adams

Newsweek International, November 6, 2006

For the past few years, global banking giants have been circling Taiwan, looking for a way in. Finally, one of them pounced. Last week Britain's Standard Chartered confirmed it had gained a majority stake in Taiwan's Hsinchu International Bank in what's at least a $1.2 billion deal. It's the first takeover of a Taiwanese bank by a foreign company, and gives Standard Chartered a foothold in Asia's fourth largest banking market. Hot on its heels, HSBC and Citigroup are now also reported to be in talks with smaller, private banks in Taiwan. (Both companies declined to comment.)

So what's the big attraction? In recent years, Taiwan's banks have successfully reduced their bad loan ratios from more than 11 percent in 2002 to about 2.4 percent in late August. They're also now at bargain prices, according to analysts. But there's more to it than the banks themselves. Analysts say that Standard Chartered is trying to tap an often overlooked chunk of the Chinese banking market: some 1 million Taiwanese work or live in mainland China and the island has pumped at least $100 billion into the mainland's booming economy since the late 1980s. Taiwanese banks can't open branches in China, and vice versa—which leaves an opening for foreign players to provide a more efficient banking link. The road to riches, it would seem, goes through Taiwan.

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