`If China Was Hoping To Cause A Collapse, They Failed'

Taiwan Inc. has weathered the intimidation--but what now?

If Taiwan is in one of its worst crises in decades, you would never know it by visiting the executive suite of its central bank. In the spacious, sparsely furnished lobby, a guard browsing through a newspaper is the only security. Emerging from his office, Deputy Governor Paul C.P. Chiu offers his visitors tea and chats nostalgically about football at Ohio State University, his alma mater.

There is good reason for Chiu's calm. Despite Chinese war exercises on the eve of presidential elections on Mar. 23, Taipei has prevented an extended panic--at least for now. With markets still tightly regulated, Taiwanese officials have deftly managed money flows long enough for investors to regain their confidence and stabilize the currency and the stock markets. Runs on Taiwan's local banks have stalled, too. "We are in a very strong position," boasts Chiu.

Indeed, the last few weeks have shown that Taiwan Inc. can withstand mere psychological intimidation by Beijing. Taiwan has formidable assets: a war chest of foreign reserves, rich financial institutions ready to follow government commands, and a still healthy domestic economy. "If mainland China was hoping to cause a collapse, they failed," says Jonathan M. Ross, country manager for HG Asia Securities (Taiwan) Ltd.

Also a plus for the Taiwanese is the fact that they didn't have to use many of their most powerful tools. The government mobilized more than $5 billion to stabilize the New Taiwan dollar at 27.50 to the greenback and the stock market at 4900. But it didn't sharply hike interest rates, unlike governments from Mexico to France that fended off attacks on their currencies. What's more, since the U.S. sent two aircraft-carrier groups to the area, investors have plowed back in. According to the central bank, even during the peak of crisis in early March, there was an $80 million net inflow of foreign capital into the stock market.

If tensions ease after the elections, economists say, the economy will remain strong. Growth is expected to be 6%, up from 4.9% in the last quarter of 1995. Inflation should stay under 4%, and unemployment around 2%. Private investment, which had taken a breather in 1994 after five years of strong expansion, should hit double-digit growth this year. Exports are expected to surge 11%, led by $21 billion in sales of semiconductors, computers, circuit boards, and other electronic products. And the trade surplus will grow to $10 billion.

Now, a debate is brewing about what the island should do next. Conservative bankers say that Taiwan needs to maintain state control of major banks and continue to amass foreign reserves. But reformers argue that if Taiwan opened its financial system to outsiders, it would gain a measure of political protection, since China might think twice before threatening the assets of Citibank and AT&T. "That, rather than just F-16s and submarines, is the best insurance we can get for Taiwan," says Chen Chi-Chu, a general manager at Taipei's International Commercial Bank of China.

HEALTHY RESERVES. Traditionally, the central bank has argued that state monopolies on telecom and petroleum or government limits on foreign ownership are justified by the need to control sudden inflows and outflows of capital. The latest cross-straits tension is a good example. Since July, 1995, Taiwan's foreign reserves have plunged by $15 billion, to $85 billion, because of the capital outflow and depreciation of its big holdings of yen and marks. Yet the island still has enough reserves to cover at least nine months of imports, triple the comfort level of most countries. Nor did China's missile tests spark a Mexico-style shock from overseas fund managers withdrawing billions in hot money.

But reformers argue that Taiwan's financial firepower could grow even faster if the economy were to open up. Even though an $8 billion stock stabilization fund has helped halt the 17% plunge in Taiwan's main stock index since last summer, another factor has been increased buying by overseas investors, who smell a bargain. Currently, foreigners can own just 20% of any company's stock. Soon, that limit will be raised to 30%. Analysts are predicting that foreigners will help drive the index up 15%, past 6000, after tensions subside. Of course, confidence could dry up again if China ratchets up its military threats. But Beijing will have to go much further than saber-rattling to seriously rock Taiwan.

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