Fortnightly Review

Fortnightly Review

Fortnightly Review

Taiwan Injects Record Amount of Stabilization Funds to Shore Up Market Amid COVID-19 Pandemic; Excluded from IMF Response

The fallout from the novel coronavirus (COVID-19)—which originated in Wuhan—is being felt throughout the world. As the coronavirus pandemic spreads, authorities around the globe are scrambling to mitigate its fatal health effects and its widespread economic disruption. Indeed, global markets are tumbling and hitting new bottoms—at least in recent memory—due to the profound impact that the virus is having on economic activities, and an end does not yet appear in sight. Governments across the world are attempting to respond to the health and economic crisis with various stimulus and stabilization measures—and international monetary and fiscal institutions are calling for a coordinated global response to assist smaller and more vulnerable economies. The US market just concluded its worst week since the financial crisis of 2008 and lawmakers are finalizing a plan to inject substantial stabilization funds. Also, just in the past week, the Taiwan Stock Exchange (TWSE) fell over 8 percent. In response to growing uncertainty in the domestic and global markets, on March 20, Taiwan’s Committee of the National Financial Stabilization Fund (國家金融安定基金管理委員會, hereafter the “National Stabilization Fund”) injected an unprecedented amount of liquidity, valued at NTD $50 billion (USD $1.65 billion), to stabilize market conditions in the country. According to the Committee’s statement on March 19:

“… negative factors such as the continued spread of the pandemic, the uncertain prospects for economic recovery, and unstable financial markets have affected the confidence of domestic investors … the resolution authorizes the Executive Secretary to use funds to perform market stabilization tasks.”

Created in 2000, the National Stabilization Fund is legally credited with NTD $500 billion (USD $16.5 billion) in funds that it may inject into the market to serve as a buffer against unexpected external factors that disrupt the market. Of the total amount of funds, NTD $200 billion consists of stock held by the National Treasury. The other NTD $300 billion is comprised of borrowings from Taiwan’s four major public funds: the Postal Life Insurance Fund, the Labor Insurance Fund, the Labor Pension and Civil Servant Fund, and Postal Deposit System. The Committee is authorized to issue funds into the market to intervene, smooth market volatility, and shore up investors’ confidence. Taiwan’s Vice Finance Minister Juan Ching-hwa (阮清華) serves as executive secretary of the NSF Committee.

The NSF’s latest injection of funds marks only the seventh time that the Committee has intervened in the last 20 years to stabilize and sustain the economy, thereby highlighting the severity of the current global pandemic. In the past, the NSF stepped in twice: in 2000 after the first transfer of political power, when Beijing issued a stern threat that spooked the market, as well as when the dotcom bubble burst; and in 2004 after the assassination attempt against Taiwan’s president and vice-president. The Committee also intervened in 2008 during the global financial crisis, again in 2011 in response to the European Sovereign debt crisis, and most recently in 2015 after the RMB depreciated sharply and the devaluation of many Asian currencies triggered panic selling. The current injection is the largest amount that the Committee has ever authorized since its inception. The NTD $50 billion is equal to one-tenth of the funds’ entire worth, four times more than the NTD $12.27 billion (USD $405 million) of liquidity that it injected into the market during the economic turmoil of 2000, and nearly 10 times more than the NTD $6 billion (USD $198 million) that it doled out as a result of the 2008 financial crisis.

Global Coronavirus Response Highlights Taiwan’s Exclusion from IMF

The proliferation of transnational threats and contagion between them should give rise to calls for a more effective cooperation and coordination among governments. The ripple effect of pandemics is one of them. Indeed, as the assessment of the US National Intelligence Council’s Global Trends 2030: Alternative Worlds highlighted in December 2012: “No one can predict which pathogen will be the next to start spreading to humans, or when or where such a development will occur. An easily transmissible novel respiratory pathogen that kills or incapacitates more than one percent of its victims is among the most disruptive events possible.” What may seemingly appear as a purely public health issue can have profound economic consequences. As this analysis published by the International Monetary Fund (IMF) noted:

“What started as a series of sudden stops in economic activity, quickly cascaded through the economy and morphed into a full-blown shock simultaneously impeding supply and demand …. The coronavirus shock is severe even compared to the Great Financial Crisis in 2007–08, as it hit households, businesses, financial institutions, and markets all at the same time—first in China and now globally. “

In addition to the World Health Organization’s (WHO) slow response to the current global health crisis, the patchwork of global economic responses to the coronavirus highlights another international institution where Taiwan is notably excluded: the International Monetary Fund (IMF). For an organization that boasts about universal membership, its membership remains far from universal even though there are no rules preconditioning membership on being UN member states. Indeed, IMF members include economies such as Aruba, Curaçao, Hong Kong, and Macau, as well as Kosovo. Moreover, as the IMF Managing Director Kristalina Georgieva recently stated: “The human costs of the Coronavirus pandemic are already immeasurable and all countries need to work together to protect people and limit the economic damage. This is a moment for solidarity.” Despite Taiwan’s large population (24 million) and key role in the global economy (22nd largest economy by purchasing power parity), it seems that the IMF does not include the island nation in its call for global solidarity.

To be sure, the Wuhan coronavirus pandemic is taking a heavy toll in terms of disrupting human lives and the economic order. Taiwan has had to undertake measures to shore up its economy during this global crisis, but it is in a position to contribute to a global response as well. Its significant role in the global tech supply chain makes it an essential part of the global recovery process. Taiwan should be a part of a global response, provided with up-to-date information and able to coordinate with other financial bodies.

The main point: In an effort to counter contagion in terms of the economic fallout from the coronavirus pandemic, Taiwan has injected a record amount of liquidity into its domestic market from its National Stabilization Funds. A more coordinated global response appears necessary to limit further serious economic damages, yet Taiwan remains excluded from the efforts of International Monetary Fund.

The New Normal of PLA Military Exercises Around Taiwan?

Since January 2020, the People’s Liberation Army (PLA) has already conducted at least five known military exercises in the vicinity of Taiwan. These exercises primarily involved flight training operations by the PLA Air Force (PLAAF). The latest exercises, which took place at 7 PM local time on March 16, included the deployment of Shaanxi KJ-500 (空警-500) early warning and control aircraft and J-11 (殲-11) fighter jets in the waters southwest of Taiwan. During the training exercise, the aircraft reportedly approached Taiwan’s Air Defense Identification Zone (ADIZ). Major General Shih Shun-wen (史順文), a spokesman for Taiwan’s  Ministry of National Defense, said that Taiwan’s F-16 and IDF fighters were deployed and drove the intruding aircraft away. This is the first time that the PLAAF has conducted nighttime patrols in the Taiwan Strait and follows a steady increase of its circumnavigation exercises over the past few years.

On January 21, in the first exercise that the PLA conducted following Tsai Ing-wen’s reelection as president, the Chinese military deployed multiple Su-30 and Y-8 aircraft from airfields in southern China that passed through the Bashi Channel south of Taiwan. On January 23, the PLA deployed the KJ-500 early warning and control aircraft and an H-6 bomber, which passed through the Bashi Channel near Taiwan’s Orchid Island en route to the western Pacific Ocean. Prior to the most recent exercise, another provocative military operation in the vicinity of Taiwan by the PLA occurred on February 9 and 10. During those incursions, the J-11, KJ-500, and H-6 flew through the Bashi Channel from the Western Pacific into the Miyako Strait. In response, the Taiwan military sent an F-16 carrying live ammunition to escort the Chinese planes. During the exercise on the 10th, the PLA dispatched an H-6 that crossed the median line of the Taiwan Strait, the first time the PLA has deliberately crossed the median line since March 2019. In turn, this prompted Taipei’s military to scramble F-16 jets to intercept and shadow the bomber. On February 12, the US military dispatched one MC-130J special combat transport aircraft and two B-52 bombers, flying respectively over the median line of the Taiwan Strait to the west of Taiwan and in the eastern airspace of Taiwan.

In response to these initial incursions by the PLAAF, R. Clarke Cooper, assistant secretary for political-military affairs at the US Department of State, stated: “Absolutely it concerns us …  [i]t was completely inappropriate of China to take such an aggressive act …. That aggressive act is not just a reflection on China’s relationship with Taiwan, it certainly is reflective about how China may be looking at the entire region in total.”

These flights appear to represent a new normal of military exercises and increased tensions across the Taiwan Strait. This trend began with the March 31, 2019 PLAAF incursion across the median line of the Taiwan Strait that has long served as an unofficial airspace boundary between Taiwan and People’s Republic of China (PRC). That was the first time in 20 years that such a deliberate incursion took place. As GTI Non-Resident Senior Fellow J. Michael Cole wrote in the Global Taiwan Brief:

 “…the median line that separates the Taiwan Strait has contributed to stability and mitigated the risks of accidents since the mid-1950s. It was the brainchild of Gen. Benjamin O. Davis Jr., Taipei-based commander of the 13th Air Force at the time. In contrast with the 1999 incident and the one that occurred last month, the majority of PLAAF intrusions across the median line have been generally brief and were considered a result of miscalculation or bad weather, although it is difficult to completely rule out intentional infractions. In past incidents the Chinese aircraft immediately returned to the Chinese side of the line after being warned off by the ROCAF, or the PLAAF aircraft would fly toward the median line but would veer off at the last minute.”

According to Taiwan’s 2017 National Defense Report released in late December 2017, between August 2016 and December 2017, the MND tracked at least 26 aerial exercises conducted by the Chinese military around Taiwan. Of those exercises, 15 encircled Taiwan, meaning that military aircraft either entered or exited the Bashi channel or approached the Ryukyu Islands. Similarly, the PLA Navy’s (PLAN) first aircraft carrier Liaoning conducted four long-range exercises around Taiwan: two exercises were west of the median line along the Taiwan Strait, and another two took place along the eastern coast of Taiwan. Exercises encircling Taiwan have become more frequent in recent years, and they have prompted concerns in Taipei about the defense of the island’s eastern flank, which in the past was considered a safe zone due to the relative capabilities of the PLA.

As former Pentagon official and Air Force Lieutenant Colonel (ret.) Mark Stokes wrote in 2017: “the PLA has a history of using airpower as an instrument of coercive persuasion against Taiwan. The PLAAF began flights over the Taiwan Strait in 1996, and extended operations to the centerline in 1999” during previous periods of heightened cross-Strait tensions. In reference to previous incursions by the PLAAF, Stokes added that “diminishing Taiwan’s air space would play into its strategic objectives and claims over disputed territories in the region.”

In light of these escalating intrusions, some analysts have suggested that Taipei should respond in kind. Indeed, one wrote:

“if China begins crossing the median line on a regular basis, Taiwan should then consider ‘normalizing’ it by having ROCAF fighters cross over the median line from time to time in like fashion. Taiwan would have a geographic advantage in already possessing and administering the land territories of Kinmen, Matsu and Penghu and the airspace immediately above and around them. “

While these more frequent exercises—particularly those that cross the center line—may be becoming the new normal, they nonetheless represent a sharp escalation of military tension in Taiwan Strait by the People’s Republic of China (PRC). As jets fly closer and closer to each other’s shores, a Chinese show of force could accidentally lead to actual conflict. According to Taiwanese Minister of National Defense Yen Teh-fa (嚴德發), the PLA staged about 2,000 bomber patrols a year near the Taiwan Strait. However, the Tsai administration has exercised a great deal of restraint in responding to these provocations and US action has helped to prevent uncontrollable escalation in the Taiwan Strait. How long this new uneasy balance can be maintained—only time will tell.

The main point: The PLA has been stepping up military exercises around Taiwan since Tsai Ing-wen became president. While Tsai has exercised incredible restraint in not escalating and the US has been responding in kind, the uneasy balance in the Taiwan Strait is becoming more tense.

Correction: An earlier version of this article incorrectly described the military exercise by the PLA on January 23 as the first exercise it conducted since President Tsai Ing-wen’s election on January 11, 2020. The first exercise in fact occurred on January 21.