Wednesday, July 29, 2009

What’s behind Taiwan’s stock/media bias?

Since Ma Ying-jeou (馬英九) came into office in May last year, financial analysts have shown an alarming tendency to attribute rises on the Taiwanese stock market to “closer relations with China” or the signing of agreements between Taipei and Beijing, while drops on the local bourse have often been blamed on mass rallies organized by the Democratic Progressive Party (DPP). As I have argued before, those assessments — which are picked up by news wire agencies and newspapers for inclusion in their reporting — often ignore macroeconomic variables and regional trends that explain stock fluctuations far better than local political developments.

For example, a modest rise on the Taiwanese stock exchange on July 27 was far more likely to have resulted from global optimism about a financial recovery than the “election” the previous day of Ma as chairman of the Chinese Nationalist Party (KMT). And yet, news agencies — quoting or paraphrasing “dozens” of analysts from global financial institutions, both “local and international,” as a reporter at a major wire agency told me during a telephone interview on Wednesday — wrote that the 0.79 percent rise was the result of Ma’s election and a congratulatory missive from Chinese President Hu Jintao (胡錦濤). That very same day, every single market in Asia was up, not because of local developments in Taiwan or even warming ties across the Taiwan Strait, but because investor sentiment was turning optimistic, as a number of wire agencies reported.

This therefore begs the question: Why, all things being equal, are financial analysts and news agencies attributing fluctuations in the Taiwanese stock exchange on local-specific events rather than general macroeconomic trends?

Part of the answer probably lies in the general belief that Ma’s KMT is pro-business, while the DPP is against it (ironically, during his second term, President Lee Teng-hui [李登輝] of the KMT was far more radical in his opposition to cross-strait economic liberalization than Chen Shui-bian [陳水扁] of the DPP was during the first two years of his first term). Still, given the DPP’s pro-independence ideology, the perception that the pan-green camp is not “business friendly” — especially on cross-strait investment and integration — is almost universal, which invites the belief that its actions are aimed at derailing the efforts to increase cross-strait financial cooperation launched by the Ma administration.

But these perceptions alone do not explain why financial analysts would purposefully attribute stock exchange negatives on the DPP and positives on the KMT. Something else must be at play, such as institutional biases or self-interest.

Starting in the mid-1990s, the nature of Taiwanese investment in China changed dramatically after a revaluation of the New Taiwan dollar severely increased the cost of manufacturing domestically, forcing Taiwanese companies to increase their investment abroad. Cultural and linguistic affinities, along with cheap labor and investment incentives, made China a logical choice. Over the years, the size of the Taiwanese companies investing in China also increased dramatically, as did the nature of the products that were manufactured there. In recent years, powerful companies in the electronics and computer sectors, among others, have established a foothold in China.

At least part of the billions of dollars required by those companies to develop business operations in China likely came in the form of loans by financial institutions and other private investors, who have an interest in seeing those investments prosper. Anything that threatens the return on investment — such as tensions in the Taiwan Strait, the threat of embargos or war — is therefore unwelcome by banks and investors who have a stake in stability. Given, as we have seen, the DPP’s pro-independence mandate and Beijing’s claims on Taiwan, the DPP has therefore come to be seen as a “destabilizing” factor, while the KMT, which favors cross-strait economic integration and warmer ties with Beijing, is now perceived as a “stabilizing” force. For Taiwanese companies operating in China (many, though not all, are either pro-KMT or silent about their pan-green political inclination lest they be singled out by Chinese authorities, as has happened in the past), as well as their financial backers, the KMT is therefore seen as a far safer option when it comes to safeguarding their financial interests.

What this means, ultimately, is that the same financial institutions that lend money to Taiwanese companies operating in China will tend to produce, or develop intimate relations with, analysts who rather than being neutral, will politicize their assessments in a way that reflects the financial priorities of their masters. If this means portraying the KMT as business-friendly, or overemphasizing local developments in a way that favors the KMT as a means to explain fluctuations in the financial market, so be it.

Equally important is the fact that many Taiwanese firms, for reasons ranging from insuring their business interests to raising enough capital, have formed multinational corporations (MNCs) with other countries to operate in China. Usually on a bigger scale, those MNCs require huge amounts of capital that can only be obtained from major financial lenders (according to statistics, 400 of the Fortune 500 multinational companies have made direct investments in more than 2,000 projects in China). Given the stakes, those lenders will also seek to ensure that their investments are shielded from the possibly disruptive consequences of rising tensions in the Taiwan Strait. Consequently, MNCs and their international financial backers will tend to disparage the DPP while encouraging the KMT to consolidate stability by accelerating economic integration with China. (This view in part stems from the contentious theory in political science that increased trade between two entities will, over time, reduce the likelihood of conflict or war by rising the cost of conflict.) Maximizing investments and protecting financial interests register far more with those multinationals and financial institutions than the question of Taiwanese sovereignty, which is the raison d’etre of the DPP.

Lastly, we must turn to the convergence of the business sector and the rise of media conglomerates for possible conflicts of interest, which could also account for the bias against the DPP in news reporting. Over the past decade or so, the number of leading companies in the information sector has drastically narrowed. News organizations like Thomson Reuters, Dow Jones and Bloomberg have branched off into other sectors and bolstered their empires through mergers and acquisitions. Thomson Reuters, for example, which has more than 50,000 employees and operates in 93 countries, now operates in the scientific, tax, accounting, legal and media sectors, with revenues last year totaling US$13.4 billion. Like any other major company, Reuters Thomson has sought to expand in China, hoping to tap into the potential 1.3 billion customers there. One recent example of this is the Scientific business of Thomson Reuters, which in September last year formed a partnership with the Investment Promotion Agency of the Ministry of Commerce of the People’s Republic of China (CIPA) to create a “World Innovation and Investment Promotion Platform” to boost the soft infrastructure of China’s high-tech zones, Xinhua/PRNewswire reported on Sept. 10.

As Mark Garlinghouse, vice president for Asia Pacific at the Scientific, Thomson Reuters, said: “The Scientific business of Thomson Reuters has long been a recognized information partner of top Chinese universities and government institutes such as the Chinese Academy of Sciences, China’s largest government research institute … We also provide patent, scientific and technical information to … well-known Chinese companies.”

This is just one example among many of media companies diversifying their business and entering lucrative markets with both the private and government sector in China. As incentives increase, and with the promise of lucrative contracts with the cash-heavy Chinese authorities always in the background, it is likely that pressure — subliminal or as the result of direct external persuasion — will eventually build for those companies to “adjust” the information they provide in their news coverage so that it dovetails with their business interest. Times Warner’s ownership of CNN, Disney’s of ABC and General Electric’s of NBC are all examples of conglomerates imposing added business pressures on news organizations.

It is quite possible that portraying the KMT-CCP dyad in a favorable light — at least on the financial front — while painting the DPP in negative terms is the latest iteration of this phenomenon.

As long as big business, MNCs and their financial backers see the DPP as a “destabilizing” threat in Taiwan Strait economic integration, we can expect that the media conglomerates that are increasingly beholden to (if not part of) those giant, multifaceted corporations will continue to disparage the DPP and favor the KMT via stock market analysis.

This article appeared in the Taipei Times on Aug. 7.


Thomas said...

I will be very interested to see how the media will continue to spin the Amazing China(tm) story in the second half of the year.

From time to time, since around March, I have seen what seem to be some pretty chilling economic analyses about China. But these analyses never seem to get much attention. In fact, most articles that talk about China's growth seem to really play up the 7.9 percent figure and the V-shaped recovery. They never delve deeper into what may be behind the growth statistics. The following article, by John H. Malkin of the AEI is very good.

I wonder how long this is all going to last. I am betting it is long enough for Ma to get an ECFA signed, especially now that he says that negotiations will officially begin in October.

Michael Turton said...

Great analysis!

vin said...

Really helps clear some stuff up. Thanks.