Taiwan kills a monkey to scare all the others

When Taiwanese prosecutors charged Robert Tsao, former chairman of United Microelectronics, with alleged breach of trust on Monday, the most remarkable point about their move was the timing.

They are targeting the founder of one of the island’s most globalised companies for alleged illegal business dealings in China only days after the island’s president, Chen Shui-bian, pledged stricter management of cross-Strait trade and investment.

While investors agree that UMC is unlikely to suffer much from Mr Tsao’s indictment, the move is serving as a tough warning to other companies.

“We have a proverb: killing the chicken to scare the monkey. In the UMC case, it’s about killing one monkey to scare all the others,” says the general manager of a Taiwanese company in Suzhou.

Officials have contributed to the perception that the government is trying to lend more credibility to this policy through the crackdown on UMC.

“We need to close the loopholes. Otherwise, companies like UMC that don’t play by the rules make those who do look stupid,” one senior cabinet official recently said.

According to Taiwanese government statistics, the island’s enterprises have invested about US$50bn in China. But private estimates put the real figure at more than double that on the back of huge illegal investment.

Shih Yen-hsiang, vice-
minister of economic affairs, says the authorities have handed out fines in 900 cases of illegal mainland investments, and know of about 300 more but had not been able to act because of insufficient evidence.

Although the cabinet has come up with a series of ideas on how to better
“manage” cross-Strait investment, the challenge will remain how to enforce any restrictions. Topping the list of new control mechanisms is a proposal to send accountants to China to trace illegal investments by Taiwanese companies.

Accountants say the idea is unrealistic. The accounts of Taiwanese firms in China are known to be opaque. Many Taiwanese investments in the mainland are channelled through shell companies, including those in tax havens without disclosure requirements.

The Ministry of Economic Affairs says it will subject future investment applications to tighter scrutiny and ask companies to submit plans on how they intend to “balance” their China investments with investments at home and in third countries.

But analysts say rather than serve as a genuine solution, this would do little more than create psychological and bureaucratic hurdles for businessmen.

For this reason, observers believe a high-profile crackdown on UMC might be the most efficient deterrent available to the government.

Late last month, prosecutors in Taiwan issued an arrest warrant for Felix Chen, chairman of Sampo, a well-known electrical appliances maker.

Mr Chen had been under investigation for alleged breach of trust because a Sampo affiliate was found to have exceeded the legal limit for investments in China. But the arrest warrant came only after he publicly attacked the government’s restrictions on mainland investments in November.

Executives and analysts say recent events turned out to be more than just a short-term attempt by the government to reassert its authority. Companies were likely to respond by moving out of the reach of the Taiwan authorities.

“The trend for Taiwan companies to take their mainland businesses public in Hong Kong rather than at home is certain to accelerate,” says a foreign banker.

By listing mainland-based investments in Hong Kong or even in Shanghai or Shenzhen, the Taiwanese parent company gets temporary relief from a rule that caps China investments of Taiwan-listed companies at 40 per cent of their net worth.

The share price of Foxconn International, the mainland arm of Hon Hai, the world’s largest electronics manufacturing services company, has tripled since Foxconn listed in Hong Kong in late 2004. Since then six other Taiwanese-owned, China-based companies have gone public in Hong Kong.

A number of large Taiwan-listed enterprises have worked out plans to delist on the island then combine their Taiwan and mainland businesses into a BVI holding, and take the new company public in Hong Kong. This would provide them with more flexibility but, says one banker, “the regulatory hurdles to a delisting in Taiwan are so high, we are unlikely to see realisation of any of these plans soon”.