Twofish's Blog

July 30, 2006

Lee Teng-Hui doesn’t understand the global economy

Filed under: china, finance, taiwan — twofish @ 10:55 am

He still doesn’t get it.

At the CSIS conference in March, one of the speakers said that the question is no longer “do we do business in country X?”, the question is “what parts of our business do we put in country X? what parts of our business do we put in country Y? what parts of our business do we put in country Z?” The way that business and commerce works is that you now have very complex and integrated transnational supply and logistic chains, and no part of these chains and remain “independent” of any other. If Taiwan tries to not get linked to Mainland China, what will happen and what has happened is that international capital will just bypass Taiwan.

And the particularly bad part is that political incompetence is destroying the natural geographical advantages that Taiwan has.  Taiwan would make a *wonderful* base of operations for a business wanting to operate in southern Mainland China (even better than Hong Kong in some ways), if not for the political and economic incompetence of the people now running the island.



  1. Written as if there were no security issues involved in Taiwan investments in China. And further, written in almost total ignorance of Lee’s actual thinking on China. It is quite true that politics is trashing Taiwan’s natural advantages of geography and common language, but that politics is the one that insists on annexing Taiwan to China, not the one that insists on a democratic and independent Taiwan.

    Lee was a leading agricultual economist whose PHD won a US award. His position is laid out in a series of speeches made a few months back. I blogged on it here.


    Comment by Michael Turton — July 31, 2006 @ 12:16 am

  2. Thanks for your comments….

    Taiwan’s security can only be maintained by a strong and vibrant economy that will insure the support of the United States and deter the PRC from doing anything stupid. As your own statistics point out, the current set of policies are literally turning Taiwan into an economic backwater which decreases any chance that Taiwan has of getting the political and economic support that it needs.

    The problem Taiwan has is that advanced economies are based on networks, and by separating itself from Mainland China, Taiwan is separating itself from the global knowledge and financial network. No major scientific society is going to hold their conferences in Taipei because they can’t get visa for people from the PRC. No major corporation is going to put their corporate headquarters in Taipei, because of the difficulty in doing business in Taipei. Taiwan needs to move strongly into high technology, high value fields like biotech, finance, and robotics. It needs to build research institutions that can rival MIT and Harvard.

    It simply cannot do this if it isolates itself from the Mainland. Advanced science, technology, and finance requires tapping into global networks of knowledge, logistics, and you *CANNOT* do this if you isolate yourself from Mainland China. You go to the labs and MIT, and they are filled with people from Mainland China (and fifty other countries). Why can’t Taiwan tap into their knowledge and expertise?

    Lee Teng-Hui really doesn’t understand this. This isn’t really a blue/green issue since a lot of the people in the DPP (Su Cheng-Chang in particular) seem to get it.

    Comment by twofish — July 31, 2006 @ 1:43 am

  3. Quick question. What advanced “financial network” is operation in China ? You can say supply chain, sure. But financial ? Nothing advanced in China yet. Anything that is advanced gets shipped to Hong Kong. Try getting a quant job in Beijing, and try getting one in Hong Kong and you will see the difference.

    Taiwan needs New York and London, not Beijing.

    Comment by Wenzi — September 28, 2006 @ 3:01 pm

  4. Mainland China has a huge amount of capital that is integrating itself with the financial networks that run through NYC and London. Witness for example, the IPO of ICBC that happened yesterday.

    What is happening is that by separating itself from the Mainland, Taiwan is increasingly being ignored by people in New York City and London. This is bad because it means that the expertise that exists in NYC and London is increasingly going to diffuse to Beijing and Shanghai rather than Taipei.

    Comment by twofish — September 28, 2006 @ 3:15 pm

  5. If you are saying that China has a large amount of capital, I think we would all agree about that.

    I am talking about the ‘financial network’. Raising and using capital, financial engineering, CMBS, underwriting, derivatives , things that make up the financial world. Let’s take a look at some of China’s largest IPSO. China Life’s IPO listing on the NYSE exchange in 2003, ( and the following tax problems ) The China Construction Bank and Bank of China’s IPO’s in HK. Why didn’t they initially list in Shanghai ? ( Sure they can do the A-Share thing and I think the Bank of China will do that soon. ) They list in HK and NY because that is where the financial talent is to do the deals and the capital markets exist to handle them. The world is increasing interrelated and the way to integration is thru NYC and London. The problem is not that Taiwan does not do business with China, the problem is that they are not doing business with NYC.

    Financial talent is limited and valuable in this world and it is concentrated in two cities NYC ( including Greenwich ) and London. Years ago, in Europe, everyone was talking about how the markets would move from London to the continent ( DAX, etc. ) for lot of different reasons ( not in the Euro, etc). The markets didn’t move. They stayed because the talent and capital markets are in London.

    Look at the financial network in Asia. You have tons of capital in Tokyo, but most of the financial products come out of Hong Kong and Singapore. The sad truth is, capital markets will be concentrated in NY/LON for a long time ( and secondary cities like S’pore, HK, San Fran, Chicago), and there is nothing that will change that. China will become a huge market for financial services, but it will not be a innovator on the world stage for a while.

    I have read your blog, and I know you want to be working in China derivatives in five years. Five years is a long time, if China loosens up on state control and increases corporate governance things will definitely improve. Don’t get me wrong, there is more than enough money to be made, but it will be different than NYC. And there is one thing that will differentiate you in China is that you will be bringing western concepts. Being a quant in China ( this if from a couple of years ago , I don’t know if it has changed ) is almost impossible to work for a fully Chinese company. Mainly because they do not see the value in what quants do and do not want to pay huge salaries. The have ( like Taiwan ) a very ‘retail’ view of the market. ( That is understandable, the west does have a much longer history of capital markets). Foreign companies and joint ventures will pay because they understand, the Chinese do not.

    The problem’s of Taiwan’s financial network lie in the retail nature of financial sector and the “top down” administration of those financial markets, as does China’s. Not in it’s closeness or distance from China. Doing more business with China will not help her integrate into a financial network. What will help Taiwan is getting a more worldly view of the financial network, moving away from just China/Taiwan think, learning from London, S’pore and H, loosening the governmental control , increasing regulatory enforcement and allow the markets to work while moving into the international capital market.

    As for the initial statement that Taiwan would make a “*wonderful* base base of operations for a business wanting to operate in southern Mainland China (even better than Hong Kong in some ways)” The markets and talent would not move from HK to Taiwan, they would concentrate even more in HK because that is where the talent and capital markets are located.

    Comment by wenzi — September 29, 2006 @ 2:54 am

  6. Oh, two more things.

    [1] If Taiwan was connected to China, they would be just as ignored by NYC and London.

    [2] Expertise will not diffuse from NY/LON to anyplace more than the market is willing to pay for that expertise or that can be supported by profits from operating there.

    Comment by wenzi — September 29, 2006 @ 3:02 am

  7. I don’t think that Shanghai will have any hope of rivaling NYC or London for at least one or two generations. Maybe in decade or two, it can be a secondary center like Chicago or San Francisco.

    But that misses my point, in that today, businesses are geographically dispersed across a large number of locations. Finance is an important part of this, but it is just one part, with manufacturing, R&D, design each in different locations and all interlinked with communication links and cheap and quick jet travel. The problem is that by not being connected to Mainland China, Taiwan is disconnecting itself from the networks (not just financial) that make up the global economy. If a MNC sites its headquarters in Shanghai, it is a quick airplane ride to and from Beijing, Guangzhou, Hong Kong, and any of the fifty places that it is necessary to do business. If it sites its office in Taipei, it is painful to get people to these places and even more painful to get people from these places.

    One notes that while finance is concentrated in NYC, there has been a tendency for MNC’s to move their corporate headquarters and R&D out of NYC to places where the cost of living is cheaper and where local governments are competiting for business. Taiwan could compete for these sorts of things, if it were more closely linked to the Mainland.

    Comment by twofish — September 29, 2006 @ 4:08 am

  8. I was only speaking of the financial part and being part of a financial network. Finance is different from manufacturing, R&D, and design, and I don’t know enough about them to comment on them.

    Finance is different as a ‘headquarters’ outside of the main office does not do to much in other countries because of regulations. If you have a sell side operation in Taiwan, they cannot sell to Chinese clients. You would have to set up a Chinese office anyway due to differing security regs. Just as a US or British sell side operation would. Buy side still has to jump thru QFII hoops in these countries to get stuff done.

    Here is my biggest problem, we have our trade management system and we can buy shares in HK or Paris just as easily as we can on NASDAQ. ( Even QFII cannot daytrade in Taiwan). We cannot do that with Taiwan. When institutional managers in NY/LON can actively invest ( besides ADR’s ) in the local Taiwanese market, they will receive as lot more attention from the world capital markets, and that it what will help them from being marginalized.

    I understand your argument and appreciate what you are saying. I am just pointing out that finance is different for Taiwan. R&D, have no idea.

    You coming to Wikimania next year ?

    Comment by wenzi — September 29, 2006 @ 5:17 am

  9. Not knowing about something doesn’t keep me from commenting since usually when I comment on something I know little about, I get quickly corrected by someone who knows a lot more than I do, and I end up learning something.

    However, my comments in this case were repeating those that the head of the US Chamber of Commerce in Taipei made at CSIS. One other thing that he mentioned was that he found it really frustrating that Taiwan’s political system was such that people spent more time arguing about constitutional issues than talking about things like reforming securities laws.

    One thing that I would have like to mention at the conference but was too nervous to was that the PRC actually did a pretty good job at drafting its securities laws, and as far as legislative procedure goes, the PRC might have some experiences here that Taiwan might find useful.

    Actually one stupid thing that I was going to say was wikimania was an example of how difficult it would be to host a conference in Taipei since PRC people can’t attend, but that was before I knew that wikimania was going to be in Taipei and yes I will attend. In the case of wikipedia, the problem is that the PRC is the side that is disconnecting themselves, with bad consequences to themselves.

    The thing about Taipei is that if it really wants to be an international R&D center, then it will have to copy the United States and offer permanent residence to researchers from everywhere including the PRC. That opens up a lot of identity issues.

    Comment by twofish — October 1, 2006 @ 12:44 am

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