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Chen shui-bian

Update No: 013 - (18/02/05)

Following the failure of the Democratic Progressive Party (DPP) to win an outright mandate in the December legislative elections, the early part of January has seen the government undertake a speedy reassessment as to where it is heading. In keeping with Chinese tradition to set the house in order (from domestic to national and all points in between) ahead of the Chinese New Year, which this year fell in the early part of February the entire 20-person cabinet of Premier Yu Shyi-Kun resigned to pave the way for such a fresh start. It will be recalled that back in December, President Chen's pro-independence DPP was roundly rebuffed by the electorate and the conservative coalition led by the Chinese Nationalist Party has retained control of the country's unicameral legislature. Most foreign governments heaved a sigh of relief that the more radical elements of Mr. Chen's policies had been stymied as a result.

Moderate Appointed to Head the Government
As an essential part of the makeover, President Chen Shui-bian has appointed long-time party ally and Kaohsiung City Mayor, Frank Hsieh, to head the new revamped cabinet as Premier. Under Taiwan's Constitution, the president is the head of state who appoints a premier to lead the cabinet and run the day-to-day affairs of government. The premier is, in turn, answerable to the legislature. Officially, Mr. Hsieh takes over the helm on 1 February.
Mr. Hsieh is regarded as a pragmatist and political moderate who may well be able to repair relations with the Chinese mainland and bring the fractious legislature under control. The relationship with China has soured in recent years. It may be recalled that after decades of frigid cross-straits relations, political discussions got underway in the early nineteen-nineties under a 1992 consensus in which both sides adopted a "One China Principle" but with each side able to interpret that principle differently. That formula fell apart when in 1999, former President Lee Teng-hui (himself a member then of the ruling National Party or KMT but also a Taiwanese nationalist) charactised the dialogue between Beijing and Taipei as "State-to-State" relations. That was done precisely to unravel the "One China" formula and its corollary of "one country two systems" which Taiwan saw applied in Hong Kong and wanted no part of. In the 2000 presidential election, it was no secret that Mr. Lee supported the opposition candidate, Mr. Chen, over the KMT's official nominee. Mr. Chen won that election in a three-way race and achieved a second term in a narrow two-way victory last year.
Mr. Chen has made no secrets of his pro-independence stance and, indeed, during the 1980s and before Taiwan democratised, was jailed for espousing the cause of independence. His elevation to the presidency has done much to firm the world-view of Taiwan's evolution as a modern democratic society within Asia but that has come at a price. The price, of course, is a deepening of the mistrust between Taiwan and the PRC. Not only has political dialogue been thrown into deep freeze but, more to the point, China has become alarmed at the prospects of Taiwan formalizing its de facto independence into a de jure claim. As a result the leaders in Beijing have been more strident in pursuing their own claim (which actually is quite tenuous in international law, amounting to a threat) to force reunification by military means if Taipei refuses to negotiate its own surrender. The rest of the world is caught between a rock and a hard place. Do governments support the overthrow by military means of a modern democratic state by a totalitarian one (albeit one that has sought to project a softer face to the world as a whole in recent years) or do governments take a principled stand and risk putting a spark to the tinder? Few people however believe that this extreme situation will arise, for any number of reasons.
Perhaps Mr. Hsieh may be able to bring the situation back from the diplomatic brink. In an early statement he called on both sides to stop promoting policies or engaging in rhetoric that would escalate tensions. He stated for the record that his approach to government would promote "reconciliation and cooperation". His tone suggests that he will be less radical with regard to Taiwan independence than the president and that he will seek to woo the Chinese leadership into a more moderate and conciliatory position. For Mr. Chen, now in his final term, this appointment offers him a face-saving compromise. Having been rebuffed in the legislative election by a constituency alarmed at his needless provocations of China, he can serve out his term as an elder statesman and let Mr. Hsieh take the running (and the heat) on the issue of cross-straits ties.

Challenges Ahead
Mr. Hsieh faces some tough challenges, not least of which is the fiscal environment. Public debt has risen under the DPP administration and as of end 2004 stood at NT$3.9 trillion (US$123 billion). The 2005 budget (NT$1.6 trillion) was approved by Taiwan's legislature in January prior to its dissolution but the opposition-controlled legislature made significant cuts in both revenue raising and spending that may make it difficult for the government to achieve its stated objectives. Changes made within the legislature will slash revenues by NT$71.6 billion and will widen the fiscal shortfall to NT$ 277 billion in 2005. Also disallowed were allocations for reform of Taiwan's banking system and specifically the rationalisation and recapitalisation of the weaker banks. Deregulation of the local banking system in the early nineties (at which time all banks were either government-owned or controlled by the KMT) not only allowed in the foreign banking community but also allowed the proliferation of local banking institutions. From only six banks in 1992, Taiwan now has 49 banks and more than 300 other financial institutions. Many of these are in a parlous financial situation as a result of aggressive lending policies and the proliferation of credit card facilities as they each sought to obtain a significant market share in a market of only 23 million people. Debt burgeoned.
The government now wants to cut back the number of banks and retain only a handful. This is the only means by which the local industry can be made competitive against the foreign banks that have been much more successful in recent years than many of their local counterparts, especially in the issue and management of credit cards. So far the opposition has used its numbers in the legislature to delay reform. Mr. Hsieh will need to use his charm and his persuasive powers in order to break the gridlock and coax the legislature to pass the needed measures so as to head off any further crises in the banking sector.
But the fiscal state of the economy is only one of a myriad of issues the new government will have to face. The last legislature also failed to approve a controversial arms procurement plan that would have seen Taiwan place orders amounting to US$19 billion with US manufacturers for advance weapon purchases. The KMT has opposed the move on the grounds that it would further complicate the relationship with China, especially as the deal would include offensive arms purchases designed to counter a Chinese potential first-strike capability against Taiwan. As for many years past, the issue of upgrading its defensive/offensive capabilities is not going to go away.
The economy is slowing with the composite index of leading indicators dropping by 1.1 per cent in December. According to the Taiwan Institute of Economic Research (TIER), one of the leading think-tanks on the island, the slowdown is coming faster and earlier than expected. Consumer confidence fell to 75.85 in December with more people becoming concerned about the outlook and the employment climate.
While inflation remains under control consumer price inflation edged up 1.6 per cent year-on-year in December and while export orders remain brisk, there are some other worrying clouds on the horizon. Export orders rose 26 per cent year-on-year in December o US$19.8 billion yet at the same time, industrial output contracted slightly (albeit by only 0.95 per cent annualised). Even while political tensions simmer across the Taiwan Straits, trade continues to boom and more and more local companies are shifting their production offshore to China. According to the official figures, investment by Taiwan into China jumped by 51 per cent last year to US$6.9 billion. The true figure is probably well above what is officially reported. Trade between China and Taiwan was also at a record high last year. According to official Chinese statistics, two-way trade reached US$70 billion in 2004. Again this may well be much understated.
All of which means, that Taiwan's reliance on China continues to increase and whatever its ultimate political fate, economically speaking, the die has already been cast.

A Small Step Forward with China
One small positive sign that things might at long last start to be looking up in the convoluted relationship between Taiwan and China is the fact that this year for the first time there will be direct (non stop) flights between the two territories during the February Lunar New Year period. Direct flights began on January 29th and will continue until February 20th. This will be the first time since the 1949 Communist victory in China and the flight of the nationalists to Taiwan that such flights have occurred. Previously flights during the lunar new year have had to touch down in a third territory (usually Hong Kong) and have involved a change of aircraft. This year there will be no such hassle.
Even prior to the commencement of these flights, Beijing itself appeared to be softening its position on Taiwan. Wang Zaixi, Vice Minister in Beijing's Taiwan Affairs Office suggested that China could be willing to restart negotiations with Taipei provided that Taiwan returned to the 1992 formula as the basis for such talks.
Yet hurdles still remain, not the least of which is the new Anti-Secession Law that Beijing plans to introduce in March this year and which is widely believed to be directed specifically against Taiwan and anybody Chinese, and non Chinese alike, who supports Taiwanese independence. The trouble is nobody has actually seen a copy of this law so far. Beijing is believed to be keeping its cards close to its chest precisely so as to prevent others from lobbying China to water down its proposed law. Many believe that this is a rather strange way to conduct the process of legislative debate and, of course, does nothing to promote the much-needed confidence-building needed on both sides of the straits. But in affairs of the Middle Kingdom, perhaps nothing should really be considered strange. No doubt by March we will all know what is in the offing.

Exchange Rates
The exchange rate to the US dollar as of 28 January 2005 stood at 31.70 (as of 31 December 2004 the rate stood at 31.917). Against the UK Pound the rate was 59.66 (60.9027). Against the Euro, the rate stood at 41.22(43.049).

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