taiwan
Taiwan’s financial system: Too many debts to settle
“I'M QUITE confident that the financial status of Taiwan is still safe,” says Yen Ching-chang, the country's new finance minister. He then goes into great detail about the subtleties that distinguish Taiwan from Japan, South Korea and South-East Asia. Whatever is about to transpire in Taiwan, he implies, cannot be as bad as what has happened in those other places. Yet if he appears to belabour the point, it is with good reason. For analysts increasingly worry that Taiwan will, in fact, suffer its own (belated) version of the Asian crisis—perhaps even before the Chinese new year in January.
The campaign by Taiwan's opposition parties to unseat the president, Chen Shui-bian, which this week moved into high gear, is only one cause for concern. Taiwan's stockmarket has fallen by 35% since Mr Chen was elected in March. In much of the country, the property market has fallen by over 50% since 1995, and the biggest corporate conglomerates are having trouble servicing their debts.
Credit in Taiwan is often secured against shares or property, so the value of collateral is vanishing at the same time as debtors are defaulting. Bad loans have now risen to record highs—5% of the total according to the government, but two to three times that level according to analysts. Many fear that there is a full-fledged banking crisis in the offing.
Taiwan: The KMT hangs fire Nov 9th 2000
It was not supposed to be like this. Taiwan long prided itself on being economically more virtuous than others in the region. As a “pariah state”, threatened by the Chinese mainland and excluded from membership of the World Bank and the IMF, it has always known that it cannot afford any type of serious crisis. Thus it has a stabilisation fund ready as a last resort to support a plummeting stockmarket. The fund has been intervening this year, but to little avail.
Taiwanese politics bear much of the blame for the mess. Rather like Japan, its former colonial master, and the other “tiger” economies of East Asia, Taiwan has its own version of crony capitalism. The Kuomintang (KMT), the party that ruled the island for 50 years until Mr Chen's election, also owns many businesses, and it influences many more through board seats or personal relationships.
It was the differences of Taiwan, however, that stuck out when financial crisis hit East Asia in late 1997. Taiwan's companies had borrowed less—and far less in foreign currencies. Taiwan had a healthier balance of payments and could defend its currency. And Taiwan had a vigorous high-tech industry that depended more on demand in the West than in other Asian economies. The conventional wisdom became that Taiwan had weathered the Asian crisis through sheer economic strength.
Instead, a different crisis was brewing. In late 1998, Taiwan's own stockmarket bubble burst, and some 30 companies—most with interests in property and close to the KMT—came near to bankruptcy. The KMT-led government at the time decided to rescue them by pressuring banks to roll over their loans. The conglomerates, meanwhile, bought or started their own banks—a practice that had contributed to the financial rot in other Asian “crisis economies”. And the KMT grew ever more desperate to stave off systemic collapse, absorbing two banks outright and leaning on others, against their better instincts, to keep lending. It “used paper to cover fire”, says Norman Yin, a professor of banking at Taipei's Chengchi University.
Lately, it appears, everything has started to go wrong at the same time. Stockmarkets have dropped in America, pulling down markets elsewhere. Semiconductor prices have been falling, thus weakening Taiwan's once-strong high-tech sector. The new government, moreover, has unsettled markets further by fiddling with too many KMT-era policies at the same time. The KMT, for its part—still smarting from its electoral loss—has been rumoured to be selling its own shareholdings, in part to score political points against the government.
To be sure, the government is not idle. To give the banks some relief, it has cut the tax on interest income, and will soon scrap it altogether. It has also invited domestic banks, foreign banks such as Merrill Lynch, and even the best domestic corporations, to invest in asset-management companies that would buy bad loans to liquidate them at a profit. To make this easier, Mr Yen, a lawyer by training, has included provisions to allow these investors to sell off assets without going through the Taiwanese courts—a notoriously arduous process.
Even so, these efforts may not be enough. Mr Yen, for instance, says that he is keen to get bad banks “out of the market”, but he also refuses to let any of them go bust, preferring instead to force them into mergers with better banks in order to replace their management. Although he bristles at the comparison, this reluctance to let insolvent banks fail is reminiscent of Japan. It may also end up infecting as-yet healthy banks.
As the Chinese start preparing for the lunar new year—by ancient tradition a time for debts to be settled—the money may grow tight. And Taiwan could then get its crisis.
“I'M QUITE confident that the financial status of Taiwan is still safe,” says Yen Ching-chang, the country's new finance minister. He then goes into great detail about the subtleties that distinguish Taiwan from Japan, South Korea and South-East Asia. Whatever is about to transpire in Taiwan, he implies, cannot be as bad as what has happened in those other places. Yet if he appears to belabour the point, it is with good reason. For analysts increasingly worry that Taiwan will, in fact, suffer its own (belated) version of the Asian crisis—perhaps even before the Chinese new year in January.
The campaign by Taiwan's opposition parties to unseat the president, Chen Shui-bian, which this week moved into high gear, is only one cause for concern. Taiwan's stockmarket has fallen by 35% since Mr Chen was elected in March. In much of the country, the property market has fallen by over 50% since 1995, and the biggest corporate conglomerates are having trouble servicing their debts.
Credit in Taiwan is often secured against shares or property, so the value of collateral is vanishing at the same time as debtors are defaulting. Bad loans have now risen to record highs—5% of the total according to the government, but two to three times that level according to analysts. Many fear that there is a full-fledged banking crisis in the offing.
Taiwan: The KMT hangs fire Nov 9th 2000
It was not supposed to be like this. Taiwan long prided itself on being economically more virtuous than others in the region. As a “pariah state”, threatened by the Chinese mainland and excluded from membership of the World Bank and the IMF, it has always known that it cannot afford any type of serious crisis. Thus it has a stabilisation fund ready as a last resort to support a plummeting stockmarket. The fund has been intervening this year, but to little avail.
Taiwanese politics bear much of the blame for the mess. Rather like Japan, its former colonial master, and the other “tiger” economies of East Asia, Taiwan has its own version of crony capitalism. The Kuomintang (KMT), the party that ruled the island for 50 years until Mr Chen's election, also owns many businesses, and it influences many more through board seats or personal relationships.
It was the differences of Taiwan, however, that stuck out when financial crisis hit East Asia in late 1997. Taiwan's companies had borrowed less—and far less in foreign currencies. Taiwan had a healthier balance of payments and could defend its currency. And Taiwan had a vigorous high-tech industry that depended more on demand in the West than in other Asian economies. The conventional wisdom became that Taiwan had weathered the Asian crisis through sheer economic strength.
Instead, a different crisis was brewing. In late 1998, Taiwan's own stockmarket bubble burst, and some 30 companies—most with interests in property and close to the KMT—came near to bankruptcy. The KMT-led government at the time decided to rescue them by pressuring banks to roll over their loans. The conglomerates, meanwhile, bought or started their own banks—a practice that had contributed to the financial rot in other Asian “crisis economies”. And the KMT grew ever more desperate to stave off systemic collapse, absorbing two banks outright and leaning on others, against their better instincts, to keep lending. It “used paper to cover fire”, says Norman Yin, a professor of banking at Taipei's Chengchi University.
Lately, it appears, everything has started to go wrong at the same time. Stockmarkets have dropped in America, pulling down markets elsewhere. Semiconductor prices have been falling, thus weakening Taiwan's once-strong high-tech sector. The new government, moreover, has unsettled markets further by fiddling with too many KMT-era policies at the same time. The KMT, for its part—still smarting from its electoral loss—has been rumoured to be selling its own shareholdings, in part to score political points against the government.
To be sure, the government is not idle. To give the banks some relief, it has cut the tax on interest income, and will soon scrap it altogether. It has also invited domestic banks, foreign banks such as Merrill Lynch, and even the best domestic corporations, to invest in asset-management companies that would buy bad loans to liquidate them at a profit. To make this easier, Mr Yen, a lawyer by training, has included provisions to allow these investors to sell off assets without going through the Taiwanese courts—a notoriously arduous process.
Even so, these efforts may not be enough. Mr Yen, for instance, says that he is keen to get bad banks “out of the market”, but he also refuses to let any of them go bust, preferring instead to force them into mergers with better banks in order to replace their management. Although he bristles at the comparison, this reluctance to let insolvent banks fail is reminiscent of Japan. It may also end up infecting as-yet healthy banks.
As the Chinese start preparing for the lunar new year—by ancient tradition a time for debts to be settled—the money may grow tight. And Taiwan could then get its crisis.