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

Can Chen stave off a financial crisis?

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 tangled web of corrupt government-business relations that throttled public works projects. "We kept complaining about the old government," says Ing, 45. But until the election on Mar. 18, when she and other bosses pushed the corporate lobby to back 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 could be headed toward a Japanese-style implosion. Chen also needs to trim the sprawling KMT business empire, make good on a raft of Democratic Progressive Party promises to clean up the environment, and keep relations with mainland China from deteriorating into a full-blown crisis.

BLACK GOLD. Chen's economic team, a mixture of seasoned players and new faces, plans 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 and government analysts estimate 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.

Black gold could even be jeopardizing Taiwan's financial system. Politically inspired loans are behind many of the estimated $32.5 billion in bad debts weighing down the country's shaky banks. Until recently, all of Taiwan's six biggest banks fell under the purview of the Legislative Yuan because the government owned at least half of their shares. Since lawmakers approved everything from budgets to executive promotions, banks accommodated politicians who asked for favors. While the government has sold shares in three banks, it still holds a majority of the three others.

Moreover, most of the 16 private banks started since 1992 are controlled by powerful business groups that continued speculating on stocks and property after a previous bubble burst in 1989. Authorities have seized Chung Shing Bank and arrested Chairman Wang Yu-yun in connection with large, apparently irregular loans to Taiwan Pineapple Co., which prosecutors believe it used to manipulate stocks. Wang is ex-mayor of Kaohsiung and father of a KMT legislator.

Under the KMT, regulators often were pressured to look the other way. In one current case, says a financial industry expert with firsthand knowledge, 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 it's not just banks. "We have a lot of problems in the financial sector," says incoming Finance Minister Shea Jia-dong, recently deputy central bank governor. Shea says many of Taiwan's 50 credit co-operatives, set up to lend to small borrowers, are effectively bankrupt.

Even though Taiwan's financial woes aren't nearly as severe as those of Southeast Asia before the crisis, the deterioration has been alarming. According to official estimates, bad loans have mushroomed from around 1.5% of total loans in September, 1998, when Taiwan's market crashed, to a record 5% now. And many analysts fear this is a serious understatement. The outskirts of many cities are littered with near-empty apartment buildings that are not generating enough cash flow to service their debts. Yet banking industry sources say their debts are still being counted as performing loans. Many apartment buildings may never be sold: National Chengchi University finance professor Norman Yin estimates there are 800,000 empty new flats in a nation of just 6 million households. Yin fears Taiwan could be poised for a collapse triggered by a property crash or a bank run. "The situation is quite serious," he 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.

Explosive political issues lurk as well. Chen's government will be under pressure to keep promises he made to Taiwan's increasingly vocal environmental movement, a major source of support. During the campaign, he pledged to cancel a $5.6 billion nuclear power plant south of Taipei. But that could prove uneconomical. Taiwan Power Co. has already spent $1.4 billion on the plant, which is 31% complete, and the utility says it must pay $800 million more for equipment it has ordered. The government plans to explore using other fuels to fire the plant, but an American analyst monitoring the project contends it will end up as "an expensive paperweight" if construction halts.

KMT BUSINESSES. The new administration has signaled it will go slow on another goal--to dismantle the KMT's sprawling business empire. The party's some $20 billion in assets range from finance to construction. The KMT suggests putting the assets in a special trust. This "does not solve the issue," contends economic planner Chen Po-chih, who believes some assets should go to the government if they were acquired through special privileges. But at the same time, the government can't afford to alienate the KMT, which still holds 51% of legislative seats. "If the new government asks about these assets too quickly, the political situation will be too unstable," he says.

Avoiding a political blowup is especially important while relations with Beijing remain volatile. Even if President Chen can avoid a confrontation, he must worry about the impact that stormy cross-Strait relations will have on the Taiwan business community's substantial mainland investments. Says First International Computer Inc. President Charlene Chien: "Stability is the most important thing for business."

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

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