In mid-June 1992, the Chinese Communist authorities in Fukien province unilaterally decided to accept the New Taiwan dollar as a payment instrument for trade with Taiwan, presumably with the approval of the Communist leadership in Peking. This move immediately provoked intense discussion in the Taiwan media. Opinions were divided. Some analysts believed that the decision was made merely to facilitate business activities across the Taiwan Straits. Others felt that there were ulterior political motives behind the decision.
Taiwan is one of the largest investors in many parts of Asia and the NT dollar has become a strong regional currency in recent years. The authorities in mainland China certainly realize this and want to be able to take greater advantage of Taiwan's large supply of investment capital. As one ranking communist official from Fukien said, the decision to accept the NT dollar in the province was aimed primarily at facilitating trade and investment with Taiwan. Frankie Hong (洪敏昌), chairman of the Council for Industrial and Commercial Research in Taiwan, agrees that Fukien's decision to accept the NT dollar would stimulate trade and attract more Taiwan investors to mainland China.
According to Hong, the policy, if actually carried out, would benefit Taiwan business people in several important ways. First, it would eliminate the troublesome number of currency exchanges necessary in transferring funds to the mainland. Presently, companies must first convert NT dollars into foreign exchange before remitting it to the mainland where it must be exchanged again for renminbi (RMB). If such conversions can be avoided, risk of losses from exchange rate fluctuations would all but disappear. Also, the elimination of currency conversions would lead to substantial savings on fees. The Fukien policy would also make it convenient for investors to remit profits back to Taiwan. At present, the communist authorities maintain tight controls on the outflow of foreign currency because the mainland still has a shortage of foreign exchange despite its growth in exports. As a result, Taiwan investors often have difficulty taking profits out of the mainland.
Yet some experts advise caution. Lin Chuan (林全), a professor of public finance at National Chengchi University, believes that Fukien's willingness to accept the NT dollar will "add to the island's mainland investment fever." This, he feels, is cause for some concern. Lin believes the government should make a full assessment of the communist strategy and take the necessary countermeasures.
Currently, the government prohibits direct investment in the mainland by local companies. All investment must be made indirectly through third areas or countries. The government maintains this policy because the Peking regime refuses to recognize Taiwan as a political entity and to renounce the use of force against the island. The mainland has also attempted to isolate Taiwan from the world community by consistently interfering in Taiwan's efforts to develop its international relations.
In reply to an Economic Daily News reporter, Ma Ying-jeou (馬英九), vice chairman of the Executive Yuan's Council for Mainland Affairs, said Fukien's decision to adopt the NT dollar as a medium for exchange poses another problem: It will encourage smuggling. The government treats all direct business dealings across the Taiwan Straits as illegal. Most of these direct transactions are on a small scale and conducted by fishermen. But because of exchange controls on the NT dollar and RMB, smugglers usually resort to barter trade. By removing such controls, the payment problem would be solved, making smuggling much easier.
The mainland, on the other hand, allows direct cross-straits trade. The value of this two-way trade is estimated at more than US$100 million a year. Peking views these activities as "small trade," provided that a single transaction does not exceed US$50,000 in value and 100 metric tons in volume. But the Fukien provincial authorities removed these limits when they announced their decision to legalize the use of the NT dollar.
Yen Tzung-ta (嚴宗大), an associate fellow at the Chung-Hua Institution for Economic Research, says that removing such trade limits will undermine efforts to fight smuggling in the straits. He believes that the measure was adopted by the mainland to push direct trade with Taiwan.
Fukien's new policy may also have ramifications for Taiwan's currency exchange rate and monetary policy. In banking circles it is believed that Fukien's formal acceptance of the NT dollar will inevitably add appreciatory pressure to the local currency. Once the NT dollar is accepted in Fukien, Taiwan importers of mainland goods will use the local currency, instead of the U.S. dollar, as a payment instrument for such purchases. This could save them both the cost and the trouble of buying U.S. dollars. Demand for the greenback will thus be reduced on the Taipei forex market—a development likely to spark appreciation of the NT dollar.
Some experts also worry that Fukien's strategy could threaten Taiwan's monetary stability. According to Susan Chang (張秀蓮), deputy director-general of the Monetary Affairs Bureau of the Ministry of Finance, "Large amounts of NT dollars circulating in a place still hostile to Taiwan could prove risky because they could be used to influence the island's financial market. In addition, they could weaken the Central Bank's ability to control the money supply." But Chang says the likelihood of such an event actually occurring is slim. The mainland, she points out, suffers a trade deficit with Taiwan. Projecting an increased need for large amounts of NT dollars to purchase Taiwan products, she believes it is unlikely that a sufficient quantity could be accumulated to pose a threat to the market.
There are more NT dollars circulating in mainland China than anywhere else outside Taiwan. This is attributable to the increase in the number of Taiwan residents visiting and doing business there in recent years. Although the total amount in circulation on the mainland is not known, some estimates put the figure at around NT$10 billion (about US$400 million). This is equal to about 2 percent of the NT$500 billion (US$2 billion) circulating in Taiwan as of June 1992. A Central Bank study published in early November puts the figure closer to NT$5 billion (US$200 million). "Such a small percentage circulating on the mainland can not seriously affect our monetary policy," said the Central Bank of China Governor Samuel Shieh (謝森中) at a press conference. Shieh advised the public not to worry about the flow of NT dollars to the mainland, explaining that it is an inevitable result of Taiwan's liberalization of controls on the movement of capital.
Some analysts, however, remain concerned about large increases in the circulation of NT dollars on the mainland. "The legalization of the NT dollar in Fukien will likely lead to a greater demand for the currency on the mainland, especially given its strong potential for appreciation against the U.S. dollar," said Chen Po-chih (陳博志), a fellow at the Taiwan Institute of Economic Research. "Also, there is the possibility that the mainland authorities may legalize the NT dollar in other parts of the country in order to promote closer economic relations with Taiwan. When this happens, the flow of NT dollars to the mainland could increase sharply. We must not overlook such a possibility and its impact on our money supply."
The possibility that the NT dollar will be accepted for exchange in other parts of the mainland was also noted by a ranking officer of the mainland's central bank, the People's Bank of China. Fang Ming-chih (方明智), director of the research institute of the bank's Amoy branch, said that Peking may gradually allow major banks in other mainland areas to provide NT dollar exchange services and to take NT dollar deposits to facilitate investment in mainland China by Taiwan companies.
Another step was taken in that direction in September 1992, when the mainland's Bank of China recommended that the state-operated Friendship Stores all over the country accept the NT dollar as payment. The main reason, again, was economic considerations. First, accepting the NT dollar would facilitate the accumulation of foreign exchange. Second, the Friendship Stores would regain some of the competitiveness lost when many new private businesses began accepting the NT dollar.
But some Taipei bankers doubt that the mainland's acceptance of the NT dollar will boost the currency's circulation on the mainland, or significantly increase bilateral trade unless Taipei further relaxes restrictions on the movement of capital. For example, by law, ROC residents can take no more than NT$40,000 (US$1,600) out of Taiwan at one time. Both the Central Bank and the Ministry of Finance, the two institutions which have jurisdiction over NT dollar movement out of Taiwan, have plans to raise that limit gradually to NT$100,000 (US$4,000). Raising the amount that can be taken abroad should increase the outflow to the mainland and elsewhere.
But an increased outflow of NT dollars alone will probably not meet the mainland's expectations of increasing trade. Only small, limited, and illegal transactions, such as those conducted by fishermen in the Taiwan Straits, will be facilitated. It will be difficult, if not impossible, to use cash to pay for large volumes of trade or investment. Payments for sizeable business transactions or investment activities will still have to be remitted through the banks of the traders involved. But the Central Bank here prohibits non-resident foreign banks from opening NT dollar accounts in Taiwan. Since this restriction denies these banks access to NT dollar funds, they cannot furnish this currency to customers. Other regulations prohibit negotiable instruments in NT dollars from being circulated abroad. In other words, foreign banks or exporters cannot cash NT dollar denominated checks, promissory notes, drafts, or letters of credit issued by importers in Taiwan banks.
Therefore, local bankers believe that unless the government in Taipei agrees to liberalize restrictions on the outflow of NT dollars, the mainland's recently adopted strategy to accept the Taiwan currency as a payment instrument is unlikely to achieve its desired results.—Osman Tseng (曾慶祥) is a senior journalist based in Taipei.