20100129 Chinese QDII an opiate, not savior

Chinese QDII an opiate, not savior

Friday, Jan 29, 2010, Page 8

The local stock market has recently been the target of speculative investment from China’s qualified domestic institutional investors (QDII), but after a memorandum of understanding (MOU) on cross-strait financial supervision took effect on Jan. 16, the bubble that had been growing for so long finally burst when the Financial Supervisory Commission announced an investment limit for Chinese QDII of US$500 million.

This figure was one-60th of the US$30 billion that certain media outlets had talked about when trying to hype the issue. Although the reported figure was later changed to US$1 billion, that figure was still twice the final amount. The overall market value of the Taiwanese stock market is more than NT$20 trillion (US$624.4 billion), so the NT$16 billion that China’s QDII will be allowed to invest will be a drop in the ocean. This shows how all the talk about Chinese QDII investment was a deliberate fabrication by the government to trick investors into thinking things were looking good, and a topic that big market players and pro-unification media blew out of all proportion.

President Ma Ying-jeou (馬英九) and his administration have adopted pro-China policies and used backroom deals between the Chinese Nationalist Party (KMT) and the Chinese Communist Party (CCP) to sign a series of cross-strait agreements while evading legislative monitoring and ignoring public opinion. These actions have been viewed by many as signs that Ma is selling out Taiwan.

The signing of the MOU was another example of such clandestine back door dealings that go against Taiwan’s interests. The MOU mainly includes agreements on Chinese QDII investing in the Taiwanese bourses, and cross-ownership between financial companies in Taiwan and China and setting up branches here and in China.

Agreements on Chinese QDII is part of the government’s efforts to attract Chinese investment to Taiwan while the second part is aimed at painting a rosy picture of the Chinese market to get Taiwanese financial institutions to take Taiwanese funds to the tiger’s lair. Once these financial operators have racked up bad debt in China, all Taiwanese will have to foot the bill.

Sadly, the inking of the MOU has been packaged and marketed by the government, certain media outlets and pro-China businesspeople as a panacea capable of reviving Taiwan’s economy, which they then hype to the stock market. Different parties use this to gain inappropriate political and economic benefits. Taiwanese investors will be fattened and then killed when prices drop again, and many individual investors will incur huge losses.

The MOU is definitely not good news for Taiwan. Many of the nation’s key industries will be swallowed up and slowly bleed to death. Speculators often compare the QDII to the Chinese government’s “through-train to Hong Kong” program. In this 2007 plan, Chinese investors could buy shares in companies listed on the Hong Kong stock exchange through Tianjin. The result was that the Hong Kong stock market increased by almost 50 percent within the space of two months. The idea is that if QDII are allowed into Taiwan, the TAIEX will soar to a new high. However, not long after the 50 percent increase, and before the global financial crisis hit, the Hong Kong stock market rapidly fell back to its original range.

It is worth noting that a recent official Chinese announcement said the “through-train” policy had failed, making it obvious to everyone the whole thing was a political measure, not a market reaction.

In the same vein, Chinese QDII investment in Taiwan will also be steered by non-economic factors. The amount of investment and the type of stocks purchased will be based on political decisions by Chinese leaders. Another possibility is that the whole exercise is a ruse. The MOU was promulgated just after the Ma administration suffered losses in the three by-elections.

These losses made the government understand that the public was dissatisfied with its blind promotion of pro-China policies and this led to the stricter investment limits for Chinese QDII. However, the government responded most unwillingly.

It is now clearly employing a strategy of first allowing smaller amounts of QDII investment before forcefully opening up Taiwan to larger Chinese investment because they think this will minimize resistance.

Chinese investors will follow China’s “economic warfare” strategy and focus on acquiring stocks in those industries crucial to Taiwan’s sovereignty as well as Taiwan’s major industries and leading corporations. If China were able to gain power over these industries and businesses, they would in effect gain control over Taiwan’s economy. Once in control of Taiwan’s economy, they would also be in political control of Taiwan. Since China’s threat of military action over the past five decades has failed, it is now using money to take Taiwan, setting its sights on Taiwan’s core industries.

Taiwan’s government acts as though it is welcoming a king and has carelessly opened the country up to accommodate China. Once the government deregulates all restrictions on Chinese QDII investment, Beijing will start swapping its cash for shares. Once China has control over Taiwan’s economy in this way, Beijing will have Taiwan by the throat and Taiwan will lose all possible ways of fighting back.

To be fair, most Taiwanese want the stock market to improve. However, ever since the financial crisis started, the bounce back of stock markets worldwide has been driven purely by the injection of funds and this is why many people have not referred to the global recovery as being built on fundamentals.

The Taiwanese stock market is no exception. A loose monetary policy, a high rate of private savings and the huge amounts of capital in our banks as a result of a willingness to invest mean that Taiwan is flooded with capital. Taiwan’s stock market does not lack capital and momentum, and there is no need to attract investments from China.

Investors should remember that Chinese QDII investment is only being allowed in for speculative purposes. Investors must remain clearheaded as they work to protect their assets and avoid becoming the prey of China and the Ma administration.