China Is Escalating The War Of Nerves

China's latest moves are intended to put maximum pressure on Taiwan--and business is paying the price

With their first democratic presidential elections slated for Mar. 23, most Taiwanese knew China would hold military maneuvers near Taiwan before the polls. Beijing has made no secret of its plans to discourage voters from casting a ballot for President Lee Teng-hui. Since his trip to the U.S. last June, Chinese leaders have vociferously accused Lee of abandoning the goal of reunification with China, instead pushing to make the prosperous island forever independent.

Even so, China's Mar. 5 announcement sent tremors through the 21 million residents of Taiwan. The reason: For an entire week, the People's Liberation Army will be launching surface-to-surface guided missiles that could land as near as 20 miles from Taiwan. "It's just so close," laments one Taipei resident.

The new exercises, backed up with land maneuvers by 150,000 troops, are Beijing's way of sending a message that it can bring Taiwan to its knees without firing a shot. For the week of the exercises, air traffic and shipping to and from Taiwan will be disrupted. The island's two major ports, Kaohsiung and Keelung, will be brought to near standstills as the tests impose an effective blockade on vital sea connections to the rest of the world. And Beijing is making it clear that it can take even more disruptive actions in the future. "China is waging economic war," says John W. Nelson, investment strategist at Jardine Fleming Taiwan Securities Ltd.

The response from Washington was decidedly low-key. The State Dept. summoned the Chinese ambassador to protest the moves. But reflecting the Administration's goal of keeping the temperature as low as possible, President Clinton was silent. So was Senate Majority Leader Bob Dole.

One reason for the caution is that many seasoned China-watchers don't think Beijing wants to turn its economic war into a real one. Instead, they say China's latest moves are part of a script designed to put maximum pressure on Lee's government in the runup to the election. For instance, the Chinese want Lee to stop his campaign to win international recognition and admission to the U.N. and the World Trade Organization. It also wants Lee to lift the ban on direct shipping and air traffic between Taiwan and the mainland.

MISSILE DIPLOMACY. Even if Beijing doesn't want a shooting war, however, many people are worrying about what can happen once the missiles start flying. While Taiwan's Defense Ministry says the M-class missiles to be fired by China are accurate enough to avoid a mishap, Taiwanese Defense Minister Chiang Chung-ling warned that Taiwan's military would respond if China's missiles violated the island's territorial waters. China has already demonstrated that its missile-related technology can go awry with disastrous results: A rocket launched in Sichuan province last month carrying a communications satellite exploded, killing six people. "If a missile goes off line and lands in downtown Taipei, who knows what is going to happen next?" frets a Beijing-based Western diplomat.

The war talk is scaring Taiwan's business community--both local and foreign. Heightened tensions are calling into question the close economic ties China and Taiwan have forged since the late 1980s. Some 20,000 Taiwanese have invested over $25 billion in the mainland, which now rivals the U.S. as the largest market for Taiwanese exports. Moreover, the military manuevers are impairing Taiwan's ability to conduct normal business activities. "If you have instability or even war, how can you do business?" asks a worried Morris Chang, chairman of $1 billion Taiwan Semiconductor Manufacturing Co. "Our survival is at stake."

The jitters also are taking a toll on confidence among ordinary Taiwanese. Many are delaying purchases of big-ticket items like autos. After Beijing's announcement of the latest tests, some Taiwanese started lining up at banks to convert their money into foreign currencies. Taiwan has suffered some $10 billion in capital flight since the military maneuvers first started eight months ago, much of it flowing into banks in California. "China is out to prove Western commentators wrong who say it doesn't have the ability to really hurt Taiwan," says the Western diplomat in Beijing.

Because China believes its saber-rattling works, it's unlikely that the crisis will be defused until after the Taiwan elections. Beijing is convinced that maneuvers held last December before Taiwan's legislative elections helped cut support for Lee's ruling Kuomintang (KMT) and Taiwan's largest opposition party, the Democratic Progressive Party (DPP). Unlike the KMT, the DPP openly advocates outright independence from China. "One purpose of the military exercises is to see the DPP's influence fall," says Li Jiaquan, a research fellow at the Institute of Taiwan Studies at the Chinese Academy of Social Sciences in Beijing. "This will allow Taiwan to move closer to China."

Beijing also wants to hurt support for Lee, whom it has branded "sinner of the millennium" for pushing policies that it says are pro-independence. But Lee is hanging tough. He now paints himself as the sole candidate who can stand up to Beijing. That resonates with many Taiwanese voters, who think that the world should recognize their achievements in building a prosperous and democratic society. "If they keep up threats, [China] will help win votes for Lee Teng-hui," says H.H. Michael Hsiao, a fellow at Academia Sinica, a research center in Taipei.

COOLER HEADS. Despite fears among Taiwanese, some foreign analysts are hoping cooler heads will prevail. China has made it clear that it wants economic ties to continue growing. As it did before earlier military exercises, Beijing has put out the word that Taiwanese investments in China aren't to be harmed. Despite the fall in Taiwan stocks, which have dropped 17% since Lee's U.S. visit last summer, international banks aren't demanding a risk premium on Taiwan paper. "The sophisticated institutions know the score," notes William H. Overholt, managing director of Bankers Trust Co. in Hong Kong.

One key in the confrontation is what percentage of the votes Lee gets in the election. He desperately wants to gain a majority, in order to prove that he has a popular mandate for his policies. Less than 50% would send a different signal. No matter how large the win, a Lee victory would allow him to present himself as the first-ever Chinese leader to be chosen by the people in a democratic vote--a vivid contrast with Chinese Communists like President Jiang Zemin and Premier Li Peng.

After the election, Lee may make some conciliatory moves to Beijing, such as holding high-level talks to defuse tensions. Beijing will be watching closely. If China doesn't think Lee is doing enough, it could escalate the war of nerves even further--perhaps by launching longer-range missiles. While they await the outcome, residents in Taiwan can only hope this drama ends without tragedy.

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