China's growing financial clout and Taiwan

Sinlaku: I went out around 9 am this morning, local time. Traffic seemed normal for a rainy Sunday and businesses were open. It is raining heavily, though with intermittent breaks, and there apparently was very little wind here in central Taiwan: no rice crushed by microbursts, no large downed tree limbs, no blown over trucks. Hope everyone is OK. The north was hit harder as the eye skirted it on its way to points west....

A spate of reports recently discusses the way China used a $300 billion bond purchase to change Costa Rica's mind about who it recognized... The Financial Times first has the call...

In January this year Safe [China's State Administration of Foreign Exchange] bought $150m in US dollar-denominated bonds from the government of Costa Rica as part of an agreement signed last year under which the Central American nation cut diplomatic ties with Taiwan (after 63 years) and established relations with the People's Republic of China.

The agreement, signed on June 1 2007 by Yang Jiechi, China's foreign minister, and Bruno Stagno Ugarte, foreign minister of Costa Rica, explicitly links the foreign policy switch to China's purchase of $300m in government bonds and a grant of $130m.

In an exchange of letters from January this year between Fang Shangpu, Safe's deputy administrator, and Costa Rica's finance minister, Safe promised to buy government bonds under the terms of the 2007 agreement, but included a clause demanding Costa Rica take "necessary measures to prevent the disclosure of the financial terms of this operation and of Safe as a purchaser of these bonds to the public".

With China's massive foreign reserves at $1.8 trillion and climbing, and Safe now the world's largest investment fund, it is a safe bet that Beijing's clout will only grow. As another FT article observed,

How do you spend $1,810bn? That is the question facing China's State Administration of Foreign Exchange. The world's largest investment fund, it has grown by $400bn this year alone. Having reserves far in excess of what it needed for insurance and currency interventions, it rightly decided to diversify and set up the China Investment Corporation, the country's $200bn sovereign wealth fund. As the Financial Times reveals today, however, Safe itself has been investing abroad. Its foreign equity positions are greater than those of CIC. This raises questions for the developed world and China.

Safe conducts its activities in secret and there is no public oversight or accountability. People think that is ominous, but in a way I take heart: you can be sure under those conditions that it will be quietly and thoroughly looted by its overseers, as well as run with growing incompetence and arrogance. Safe opened a Hong Kong subsidiary to take positions in Western blue chips, as yet another FT article describes:

According to Chinese media reports that officials in Beijing confirmed as largely accurate, Safe has also used a shadowy Hong Kong subsidiary to build stakes of less than 1 per cent in numerous companies listed in the UK, including BHP Billiton, Rio Tinto, Unilever, Tesco, British Gas, Cadbury, Royal Bank of Scotland and Barclays Bank, as well as in other markets.

While some western politicians worried about the transparency and strategic and political intentions of CIC, Safe was building offshore equity positions that now exceed the $90bn (€65bn, £51bn) total that CIC has to spend abroad, according to estimates by people in Beijing familiar with Safe's operations.

CIC was set up specifically to enhance returns on a portion of China's more than $1,800bn in foreign exchange reserves and has publicly and repeatedly said its investments are decided on a commercial basis, not influenced by political concerns. Safe, on the other hand, barely makes any public statements, has never revealed its investment criteria and takes great pains to disguise the investments it makes all over the world.

A Taiwan MODA spokesman observed yesterday that Taiwan just couldn't afford to play tit-for-tat with a sovereign wealth fund whose total assets are six times the size of Taiwan's GDP:

Taiwan’s Ministry of Foreign Affairs (MOFA) spokesman Henry Chen (陳銘政) said yesterday : “The truth of why Costa Rica broke up with us has finally been revealed.”

“It just goes to show that if we had continued to engage in a hostile diplomatic race with Beijing, Taiwan would unquestionably have been crushed,” he said.

Chen said for the year 2008 to 2009, MOFA’s budget has been roughly earmarked at US$1 billion (NT$30 billion).

“There is no way that we would be able to allocate one-third of our annual budget on cementing ties with just one country,” he said.

The article noted that China had agreed to purchase $150 million in government bonds in Jan of 2008 with another $150 million in purchases due in Jan of 2009. The smarmy nature of all this is illustrated by the fact that the deal is being handled by a bank founded by the former Costa Rican ambassador to China, who remains a shareholder in the bank. Taiwan's aid donation, I've heard, similarly vanished into the pockets of officialdom.......

With clout like this, Taiwan's diplomacy would be in trouble even if it were not being run by an administration that is staging a retreat from the position that Taiwan is a sovereign nation and who, as a piece in today's Taipei Times by a longtime KMT stalwart observes, has positioned himself as nothing more than a regional administrator...that growing lack of a positive and aggressive foreign policy is probably the reason Taiwan's Ministry of Foreign Affairs (MOFA) said this weekend that China pressure on Taiwan is actually falling, with fewer incidents recently. What is there to have "incidents" about if you don't have a foreign policy?

It is a truth universally acknowledged, that a single nation in possession of a sphere of influence, must be in want of a rival. US officials, looking at our own financial disarray thanks to the license to loot that deregulation represented, appear to be viewing the Communist investment house with great trepidation. As well they should.

[Taiwan]