The Hazards For President Chen Aren't Just Across The Straits

Corruption, financial reform, nuke plants--the list is long

Nita Ing knows why she voted for Taiwan's incoming President Chen Shui-bian. She wanted an end to 55 years of uninterrupted rule by the Kuomintang (KMT). Ing--president of contractor Continental Engineering Corp. and head of Taiwan's $15 billion high-speed train project--was fed up with the corrupt web of government-business relations that throttled public-works projects. "We kept complaining about the old government," says Ing, 45. But until the Mar. 18 election, when she and other corporate bosses backed opposition leader Chen, "we didn't know if we had the courage to change."

Now that they have taken the leap of faith, business leaders such as Ing are hoping the new government will move full-speed ahead with domestic reforms. There is more than enough to keep Chen busy through his four-year term. Even though strong electronics exports and $114 billion in foreign reserves have enabled Taiwan's economy to bubble along at 6.5% growth--and largely escape the Asian crisis--serious hazards lurk. Besides cleaning up corruption, his team must quickly repair a banking system that some observers worry is headed toward an implosion.

Chen's economic team is planning to hit the ground running once Chen takes office on May 20. Atop the agenda is fighting "black gold"--the Taiwanese term for political payoffs. It's hard to know where to begin: The DPP estimates at least 50 of the current 224 members of the Legislative Yuan--and more than one-third of local councillors--have ties with organized crime.

BAD DEBTS. The problem is so bad that it may even be jeopardizing Taiwan's financial system. Politically inspired loans are behind many of the estimated $32.5 billion in bad debts weighing on the books of banks. Until recently, all of Taiwan's six biggest banks fell under the legislature's purview because the government owned at least half of their shares. Since legislators approved everything from budgets to executive promotions, banks lavished politicians with favors. Moreover, most of the 16 private banks started since 1992 are controlled by powerful business groups who long have been speculating on stocks and property.

Under the KMT, regulators often looked the other way. In one current case, says a financial-industry expert, a Big Five accounting firm and regulators have signed off on bank books that are riddled with bad loans. "We saw numerous loans with companies that were in bankruptcy that were not even classified as nonperforming," says the source. And the problem isn't just banks. Incoming Finance Minister Shea Jia-dong, recently deputy central bank governor, says many of Taiwan's 50 credit co-operatives are effectively bankrupt.

The deterioration of Taiwan's finances has been alarming. According to official estimates, bad loans have mushroomed from around 1.5% of total loans in September, 1998, to a record 5% now. Many analysts fear this is a serious understatement. Taiwan's cities are glutted with near-empty apartment buildings that aren't generating enough cash to service their debts. National Chengchi University finance professor Norman Yin estimates there are 800,000 empty new flats in a nation of just 6 million households. "The situation is quite serious," Yin warns. "The whole financial system is vulnerable to crisis."

Chen's new ministers share the concern. "The situation is worse than people see," concedes Chen Po-chih, incoming minister of the Council for Economic Planning & Development. Finance Minister Shea says the new government is exploring setting up an asset-management corporation to take over bad loans and supervise a bank cleanup. It also will encourage relatively healthy banks to take over weaklings.

Compared with many of its Asian neighbors, Taiwan still has some extraordinary economic strengths. But Chen Shui-bian has a lot of hard work in store if Taiwan is to keep moving forward. And his job starts with the banks.

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