Last updated: December 22, 2008 6:58 pm

China bails out Taiwan

How to win friends and influence people: pay them. As China grows richer, so does its cheque book diplomacy. This worries multilateral institutions, who see their conditional lending undermined by less fastidious hand-outs, for example in Africa. The financial crisis is now yielding juicier opportunities. Just before Christmas, Beijing offered $19bn of loans to Taiwan, the island from which it has been separated since the Chinese civil war ended in 1949 and over which it claims sovereignty. Chinese state banks have been dragooned into giving loans to Taiwanese investors in the mainland. China will also spend $2bn on flat-screen monitors.

“Compatriots on both sides are part of the same family,” said Wang Yi, head of China’s Taiwan Affairs Office. “We feel the same pain.” Not half. Taiwan, along with other parts of the Chinese diaspora, such as Hong Kong and Singapore, accounts for the majority of foreign direct investment into China. Taiwan’s share clocks in at about 7 per cent in the 15 years to 2004, or even more if it is assumed some is routed through Hong Kong. Taiwanese manufacturers who headed across the Straits in search of cheaper land and wages may have invested some $150bn in China.

Alas, it is easier to see China’s largesse backfiring than giving Taiwan a boost. First, the numbers are small: $2bn represents maybe 6 per cent of Taiwan’s annual flat-panel sales. Ordering China’s banks, which are essentially domestic lenders, to make loans overseas will undoubtedly tax their risk-assessment skills; and any bad loans will hardly cement relations. Chinese aid is no cure-all, as shown by Hong Kong’s closer economic partnership arrangement – styled by Beijing as a “win-win” deal, it in fact brought limited benefits to the territory. This beats bellicose rhetoric, of course, but Taiwan should hardly expect something for nothing.

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