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EDITORIAL: Hedging
against a rainy day
It is clear that whoever hopes to win the presidential election next year will
have to propose a sound strategy on how to deal with China: not just
politically, but also economically.
The process of cross-strait economic liberalization launched in the 1980s and
sustained even under the pro-independence Democratic Progressive Party from 2000
until 2008, accelerated dramatically after President Ma Ying-jeou (°¨^¤E) of the
Chinese Nationalist Party (KMT) stepped into office on May 20, 2008. With the
signing of the Economic Cooperation Framework Agreement (ECFA) in June last year
and various other economic pacts in recent years, the dependence of Taiwan¡¦s
economy on China has grown by leaps and bounds.
Putting the political implications of those agreements aside, we will leave it
to the history books to judge whether the decision to open the gates to Chinese
money was economically sound for Taiwan. A growing number of economists are
claiming that China¡¦s economic miracle is heading full speed for a brick wall.
Although such predictions have been made for more than a decade, there is
evidence that this time the alarmists could be right.
Should such pessimistic forecasts come to pass, the more dependent Taiwan is on
China for its economic well-being, the more severe the repercussions of a
downturn across the Taiwan Strait will be.
Earlier this month, renowned economist Nouriel Roubini was warning of
potentially destabilizing contradictions between China¡¦s short and medium-term
economic performance. In his view, China was able to weather the global economic
crisis and sustain double-digit economic growth by artificially propping up its
economy with major infrastructure projects.
However, this stopgap measure cannot go on indefinitely and already the
construction spree is catching up with China as evidenced by low usage of its
high-speed rail systems, highways leading to nowhere and steel-and-glass ghost
towns. Furthermore, a recent scandal about the safety of China¡¦s new ultramodern
high-speed rail system has highlighted the prohibitive cost of construction and
operation. The rail system, which was part of Beijing¡¦s stimulus plan for 2008,
is already losing money and depends for its survival on bank loans. The Chinese
Ministry of Finance last week confirmed that its debt currently stands at US$276
billion, which was almost entirely borrowed from Chinese banks.
A great share of the massive infrastructure projects that have sustained the
illusion of a booming Chinese economy has been buttressed by bank loans and many
of those are non-performing and will very likely never be reimbursed. Add
rampant corruption, as was ostensibly the case with the underused high-speed
rail, to this mix and there are the makings of an economic time bomb ¡X the
consequences of which for the Chinese economy (and the region) one can only
guess at.
For Taiwan, these signs should awaken officials to the need to implement
prophylactic measures in the event the Chinese economy implodes. The key to this
is threefold: ensuring Chinese money in Taiwan comes from economically sound
institutions; redoubling efforts to attract foreign investment from sources
other than China; and diversifying export destinations (Taiwan¡¦s exports to
China plus Hong Kong last year accounted for about 42 percent of total exports.
Inflation, or a major economic downturn in China, would have a serious negative
impact on Taiwan¡¦s exports).
While there is no way to avoid significant trade with the giant next door, the
candidates in next year¡¦s presidential election should clearly explain to the
public how they intend to hedge against a possible rainy day in China. It¡¦s not
a question of whether Taiwan should deal with China or not, but how.
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