Taiwan fails to lure mainland investors

For Asia Times www.atimes.com

TAIPEI – Taiwan has gradually opened up to investments from China since 2009. Relaxations have been hugely controversial over concerns that the former arch-enemy would use its money as a means to achieve backdoor unification. But as of today, a noteworthy flow of Chinese foreign direct investments (FDI) toward Taiwan is conspicuous by absence. Aggregated they had only reached some US$150 million at the end of last year, a Lilliputian

   
amount compared to 2011’s total foreign investments in Taiwan of $9.53 billion. The Taiwanese government’s red tape is not the only reason for the disappointing figure. 

Those who have $150 million to spare could afford a fancy office tower on top of a Taipei subway station; or a massive cement factory in some Taiwanese backwater town; or two dozen topnotch helicopters. Anyway, $150 million is petty cash for China, the world’s largest foreign exchange reserve holder with reserves as high as $3.2016 trillion, especially when considering that it’s assessed Beijing would do almost anything to pocket Taiwan. 

A comparison with other countries’ FDI on the island makes the insignificance of the sum even clearer: Taiwan’s largest investor last year, with investments worth $2.15 billion, were the Americans, while the Singaporeans came in second at $1.02 billion, followed by the Japanese at $0.97 billion. And in China, about 80,000 Taiwanese enterprises have invested with value totaling some astronomic $80 billion. 

To make China inject cash into their economy, the Taiwanese implemented two waves of opening. Both of which were largely spurned. 

In 2009, Chinese FDI was allowed in 192 items that were not considered sensitive, such as textiles, garments and clothing accessories, electronic components, computers, mobile phones, automobiles and plastics. As the industries involved were competitive, low profit or mature, this opening only brought in some $140 million. But when in March last year, panels and semiconductors together with 40 other sectors were put on the list, the amount was predicted to grow dramatically. 

Chinese TV brands would form strategic alliances with LCD panel firms in Taiwan in order to stabilize their component supply, while the Taiwanese firms in turn would be able to afford technology upgrades to compete against rival South Korea, economists and officials predicted back then. They said the Chinese would put up with rules such as the one that prohibits them from having board control over their Taiwanese partners, or the one that only allows them to acquire a maximum 10% stake in existing Taiwanese technology companies. 

Decisively belying this optimism, what was meant as a landmark relaxation only made the tiny difference of $10 million. As an outcome as surprising as embarrassing, Taiwan has not attracted any Chinese investment in anchor sectors, such as panels and chips, since. 

Whether the Chinese will be more tempted to invest in the island’s financial sector is left to be seen. In January, Taipei allowed banks from across the strait to acquire stakes in Taiwanese banks and financial holding companies. According to the new rules, qualified Chinese lenders may take up to a 5% stake in a single Taiwanese bank or financial holding company, but collectively their shares may not exceed a 10% ceiling. China Construction Bank (CCB) and Industrial and Commercial Bank of China (ICBC) are rumored to harbor interest but have not filed applications to date. 

Furthermore, under present rules, Chinese lenders are allowed to open one branch each in Taiwan. Applications by the Bank of China and the Bank of Communications to upgrade their representative offices in Taipei to branches were recently approved of. China’s third and fifth-largest lenders by asset are now authorized to invest $40 million and $51 million, respectively.

An announcement on a third wave of opening to Chinese FDI is expected in March. Taiwanese officials indicated that Chinese firms will be allowed to build subways, roads and stations, among other infrastructure, but that their funds will still be banned in the property market to prevent speculation. It is furthermore relatively certain that neither will enterprises operating fixed networks and telephone services be allowed nor that restrictions on advertisements by Chinese companies will be relaxed. 

In interviews with Asia Times Online, economists shed light on why China’s firms don’t take the bait. According to them, it’s not only the island’s rigid regulators who deserve the blame. 

“The lacking of investment incentive is the main reason and strict regulations is the second one,” said Peter Wang Yu-Ter, an economist at Ming Chuan University in Taipei. “This might be bad for Taiwan’s economic development. But political factors are usually taken into account in any affairs between China and Taiwan.” 

The omnipresent political component in Taipei’s decision-making comes about because the unification-wary among the Taiwanese fear that Beijing wants to control the island’s economy via FDI while at the same time locking up Taiwan’s own capital and talent in the mainland’s. 

Hong Honigmann, professor at National Tsing Hua University, pointed at yet more reasons for the absence of monetary windfall. He weighed in that according to the textbooks of economy, FDI tend to flow from developed countries into developing ones. “So if China invests in Taiwan, it could be called an adverse current.” 

Hong furthermore emphasized that a cross-strait investment agreement has yet to be signed, and that “FDI usually come along with flows of personnel and services, all of which being obstructed by Taipei when dealing with China.” 

A cross-strait investment agreement has despite intense negotiations failed to materialize as Taipei requests international arbitration which Beijing opposes as it would imply Taiwanese statehood. As indicated by Hong, obtaining Taiwanese visas is far more complicated for Chinese citizens than for nationals from Taiwan’s other major FDI sources. 

Ronald A Edwards, a specialist on China’s political economy at Tamkang University in Taipei, singled out restrictions on the purchase of land as a major turn-off as well as significant political risks. 

“Any sudden massive influx of investment from the mainland is bound to cause a political reaction in Taiwan that works against further investment and possibly also against mainland Chinese investors’ chances to obtain the returns on their investment,” Edwards said. 

“Also, with Taiwan’s presidential elections cycles being only four-year periods, there’s the scare of possible roll backs of investment-related agreements should the DPP [anti-unification Democratic Progressive Party] take over the administration.” 

In far-away Vancouver, Yves Tiberghien, a China expert and associate professor at the University of British Columbia’s Department of Political Science, argued that investments in Taiwan don’t fit with China’s FDI patterns anyway. 

“Chinese outward FDI is mostly seeking to get natural resources, financial firms, or some industrial firms in Western powers. There is not much in Taiwan that Chinese firms cannot already have in the mainland. So, it could be mainly that – a question of demand.”

Also Hu Sheng-Cheng, an economist at Academia Sinica, Taiwan’s most renowned research institution, presented an intriguing explanation for China’s lackluster investments. 

He said that the presidential and legislative elections held in mid-January, in which Ma Ying-jeou of the Beijing-friendly Kuomintang (KMT) won re-election, showed that Beijing achieves its objectives without having to waste money on little lucrative investments in Taiwan. Shortly before the polls, a number of Taiwanese entrepreneurs active in China publicly endorsed the Beijing-friendly cross-strait approach of Ma, a move that likely contributed a good deal to his win. 

“If mainland China wants to control Taiwan’s economy, all it has to do is pressuring the big Taiwanese companies in China. They don’t even have to come here investing for this,” Hu said. 

He concluded on a disturbing note. According to him, while China spurns investing in Taiwan’s technology firms and their likes, it will be much more interested in the financial sector. 

“Through the banking pipeline, the mainland can obtain detailed information about Taiwan’s economic operations; this, and not FDI, will enable them to directly control Taiwan’s economy.” 

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