Taiwan: Let The Banks Go! No, Don't!
Edward Chien, president of Taiwan's Hua Nan Commercial Bank Ltd., wants to hire some MBAs from American schools, but he can't. As head of a bank controlled by the provincial government, Chien is allowed to hire only candidates who have passed state exams emphasizing the writings of Republic of China founder Sun Yat-sen over banking skills. Politicians eager to gain opportunities for themselves or friends also meddle in every aspect of Chien's business, from ordering paper clips to computers. And if the commercial lender wants to expand into such fast-growing areas as retail banking? Forget it. "The provincial assembly will do whatever they can to control us," Chien says. "We need some kind of breakthrough."
But now, talk of a breakthrough is in the wind. Hopes are rising that the government will privatize three banks owned by Taiwan's provincial government--Hua Nan, Chang Hwa Commercial Bank, and First Commercial Bank. Shares of the three, which control $99 billion in assets and which have public stockholders as well, have risen sharply in recent weeks, partly on expectations the government will privatize them. Taipei also may sell a fourth provincially owned lender, Medium Business Bank of Taiwan, and two more controlled by the central government, while holding on to several other specialized banks.
The privatizations of the province's banks could follow from politicians' moves to reach an agreement on phasing out the Taiwan provincial government. Since Kuomintang forces fled to Taiwan in 1949, the provincial government has duplicated many functions of the central government and stood as a reminder of the Republic of China's claim to represent all of China. The ruling and the opposition Democratic Progressive parties agree the two-layer system is inefficient. But backers of reunification with the mainland--and Beijing as well--fear any phaseout would amount to a step toward declaring independence.
Undaunted, Finance Minister Paul C. H. Chiu insists that the banks will be privatized "within five years, hopefully sooner." A sale could even happen in 1997 or '98. In addition, the government announced on Jan. 25 a plan to sell stakes in Chinese Petroleum, Taiwan Power, and Chungwa Telecommunications to help reduce its deficit.
Despite their size, the three biggest provincially owned banks are losing ground to 16 private lenders run by local business groups that were allowed to open five years ago. Citibank, meanwhile, has become the leader in the booming credit-card market, with about 5 million cards. But once the banks are sold off, says Chen Chi-chu, executive vice-president at the privately owned International Commercial Bank of China, "the shackles will be released."
Despite the Finance Minister's aims, provincial pols won't give their banks away easily. The banks are a prime source of income for the provincial government. Members frequently use them to obtain loans or oblige the banks to buy from companies they control at above-market prices. Bankers succumb to the pressure because assembly members control their career advancement as well as their purse strings.
Provincial assembly members may also resist privatization because a sell-off could force disclosure of politically connected loans that might embarrass assembly members or even KMT higher-ups. So it's no surprise that provincial pols are fighting the central government's wishes. "We have asked that the banks be privatized, but the Provincial Assembly has resisted it," says Chiu.
WEIGHED DOWN. While the fight rages, Taiwanese companies and the public are paying a price. Outside of politically connected business, the banks are ultraconservative, usually lending only on collateral. That means startups have had to look elsewhere and pay higher rates. Worse yet, the banks have been weighed down by bad loans and burdened by a soft economy, so their profits from banking operations have been declining. To reach earnings targets set by the provincial assembly, they have had to sell land and stocks.
Even if privatization passes, it will take time to erase the banks' civil-service culture. Eddy Chang, banking analyst with HG Asia Ltd., says that at the outset the banks will lack the technology and skills to enter new businesses such as credit cards and could have problems attracting good staff. "These banks are not ready for privatization," Chang says. But experts feel they'll catch up. Taiwan's financial system is overdue for a change, and the national government is determined to see it happen.