Waves of Capital : Nervous Taiwanese Transfer More Than $1 Billion to Southland

By the time China’s test missiles began exploding off the coast of Taiwan last July, the reverberations were already being felt thousands of miles away in Los Angeles’ Chinese community.

Bankers began getting transpacific phone calls from worried Taiwanese customers looking for advice on a safe place to stash their money. Small branches of Chinese community banks noticed an unexpected surge in funds being wired in from Taiwan and Hong Kong.

Within days, it became clear this was not business as usual. By the time the flood of money began to subside last month, a shellshocked Chinese banking community figured that at least $1 billion--and perhaps many billions more--had poured into Southern California from Taiwan.

“People are talking about $1 billion to $10 billion,” said Li-pei Wu, chairman of Los Angeles-based General Bank, a major Chinese community bank and beneficiary of this unexpected largess. “I would not be surprised if it were several billion.”

The magnitude of the windfall--triggered by a particularly high-visibility round of saber-rattling by China and a corresponding plunge in the Taiwan stock market--illustrates the depth of the anxiety felt by Taiwanese about their government’s on-again, off-again relationship with its longtime enemy across the Taiwan Straits.

But it also demonstrates how closely this region’s economy is tied to the well-being of an overseas Chinese Diaspora stretching from Taiwan, mainland China and Hong Kong to the ethnic Chinese communities in Southeast Asia and Southern California.

And bankers predict even more money will be funneled to the United States over the coming year due to continuing political uncertainty in cash-rich Taiwan, which is holding key elections in December and March, and the impending takeover of Hong Kong by mainland China in 1997.

The movement of funds out of Taiwan can be measured, in part, by the decrease in that nation’s foreign exchange reserves, which dropped from a peak of $100 billion in June to $90 billion in September. But it is much tougher to show where that money went, since it often travels a circuitous route before being parked for any amount of time.

In Los Angeles recently, David K. P. Li, chief executive of the Hong Kong-based Bank of East Asia Ltd. and chairman of the Chinese Banks’ Assn., confirmed that a large amount of money from Taiwan had been moved to Hong Kong and then on to California in the past four months.

While much of that money landed in the Chinese community, bankers also believe a chunk of it was deposited with large mainstream banks such as Bank of America and the California branches of major Japanese banks.

Even if it reached the $10-billion estimate, this flow would barely make a dent in an economy as large as California’s, where the commercial banks alone control assets worth $358 billion and deposits of $277 billion. And money moving from the Far East into California is nothing new.

But local Chinese bankers say they have never seen so much money move here so fast. And it has had a dramatic impact on Southern California’s Chinese community banks, whose combined deposits are estimated at $5.1 billion.

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Bankers in Downtown’s Chinatown, Monterey Park and other predominantly Chinese communities watched their deposits multiply severalfold over a matter of days. Taiwanese customers of the Irvine branch of Far East National Bank bought up nearly $10 million in one-year certificates of deposit. Some smaller banks were forced to turn away potential business because they couldn’t absorb such huge amounts so quickly.

“There’s a lot of nervousness there,” said Henry Hwang, Far East’s chairman and president.

The sudden money glut has sparked a feeding frenzy in the Chinese banking community, where the addition of half a dozen new banks from Taiwan has already led to more aggressive competition over the past two years.

The bonanza has forced even the largest local Chinese community banks--General Bank, Cathay Bank and East West Federal Bank--to compete more aggressively for loans and seek out other investment opportunities. Most banks are no longer allowing large depositors to negotiate better interest rates because they have plenty of cash, according to General Bank’s Wu.

“It’s a very tough market,” said Joseph Jao, general manager of the newly opened Los Angeles branch of First Continental Bank, a major Taiwanese institution.

Yet the banks’ options are narrow. Most of the Taiwanese funds went into time deposits such as one-year CDs. Since there is no guarantee that the money won’t be pulled back to Taiwan, the banks are limited in how they use it. No one wants to get caught with a sudden demand for capital that is tied up in long-term investments.

The sluggish California economy, meanwhile, means much of the money is going unused.

“It’s always nice to see your deposits grow,” said Dunson Cheng, chairman and president of Cathay Bank. “But because of the economic climate we’re in . . . we don’t see a huge demand in loans which means that we cannot really put these deposits into good use.”

Meanwhile, Taiwan, where Chiang Kai-shek re-established his Nationalist government after he fled the mainland in 1949, is hardly endangered by this sudden bout of capital flight. The country’s export-driven economy remains one of Asia’s success stories and its foreign reserves are second only to Japan’s.

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However, the shift of capital has undermined Taiwan’s efforts to boost consumer confidence and increase liquidity in the economy after reports of fraud triggered runs on two major financial institutions in August and September, according to a recent Salomon Bros. report.

One Hong Kong analyst predicted the capital flight could continue through next spring, given the political uncertainties surrounding the upcoming legislative and presidential elections.

The Taiwan government, anxious to allay fears about its political stability, argues the reports of capital flight are exaggerated and simply reflect the nation’s expanded economic clout overseas.

“Our people are always taking some money from Taiwan to the outside, especially to Los Angeles, because they’re looking for some opportunities . . . to support their relatives and family members doing business in Southern California,” said Chang-lu Lee, commercial chief in the Los Angeles office of the Taipei Economic and Cultural Office, Taiwan’s official representative. “This is not so special.”

But here in Los Angeles’ Chinese banking community, business is far from normal.

Veteran bankers like Wu, who has been in the business for more than three decades, have seen slight fluctuations in capital flow during times of increased political tension between Taiwan and mainland China. But the size and suddenness of this recent shift in funds was unprecedented.

“This is by far more significant than in the past,” Wu said.

At the Los Angeles branch of Sanwa Bank, which has aggressively targeted the overseas Chinese market, a wealthy Taiwanese customer canceled his plans to borrow $1.4 million here to build a house in Los Angeles. Instead, he decided to move money from his account in Taiwan to pay cash for the new home.

At Cathay Bank, a major player in the local Chinese community, the $60 million to $100 million of funds that came in from Taiwan since July represented a tenfold increase over the bank’s normal level of business, according to Cheng.

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“I’ve not seen anything like that in such a short period of time,” he said.

The suddenness of the infusion and general economic weakness locally have created a quandary. Victor Van, president and chief executive of Trust Bank, a small Monterey Park institution, said many of the community banks are having problems digesting this glut of funds from Taiwan.

“It’s hard to find good projects to invest in because the real estate market is so slow,” he said. “These [Chinese community] banks usually don’t do trade financing and they are having a difficult time finding companies to invest in. It’s also hard to find experienced loan officers to go after these loans.”

Van, a former Sumitomo Bank officer, predicts some of these funds will return to Taiwan because of currency pressures. In the past few months, he said, the volatility of the New Taiwan dollar against the U.S. dollar caused a $40,000 paper loss for one Taiwanese who had transferred $1.5 million to the United States.

But others expressed confidence much of this money will eventually work its way into the Southern California economy, given the region’s historic attractiveness to Asian investors and immigrants.

Eddie Chao, a Los Angeles investment consultant, said the political uncertainty has prompted wealthy Taiwanese to think more seriously about moving funds to other parts of the world. In addition to major investments in Southern California, Hong Kong and mainland China, they are aggressively expanding in Southeast Asia and have led the charge into Vietnam.

“In the long term, this [political uncertainty] does have an impact because it makes them start thinking about diversifying their portfolio into other parts of the world,” said Chao, who spends two weeks a month in Taiwan.

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Even before this summer, many wealthy Taiwanese were looking for investments in Southern California, hoping to benefit from the drop in real estate prices and the selloff of properties by debt-laden Japanese investors.

In the past two years, Taiwanese have been involved in most of the major real estate transactions in Downtown Los Angeles, including the purchases of the 1100 Wilshire and 811 Wilshire office buildings, the Pacific Center and the Japanese Village Plaza in Little Tokyo.

“The ones coming in and buying are the Taiwanese and hopefully that will help support the depressed real estate market,” said Dominic Ng, president and chief executive of San Marino-based East West Bank.

Some Southern California real estate consultants and bankers are bracing for another uptick in investments from Hong Kong in the run-up to 1997, when the British colony returns to Chinese rule. Over the past decade, billions of dollars have flowed out of Hong Kong, primarily to countries like Canada and Australia that offered immigration privileges in exchange for large investments.

Many Hong Kong residents have applied to emigrate to the United States but are keeping their money in the colony as long as possible because the potential investment returns in the vigorous Hong Kong economy are greater.

Randy Lee, of Lilly Enterprises, a Los Angeles investment brokerage, predicted that money will make its way into the Southern California economy very quietly because Hong Kong’s biggest players don’t want to fuel anxieties about the colony’s future or anger the political bosses in China.

“We are already seeing that money coming this direction,” he said. “It’s coming more than people believe.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

China Bank Syndrome

For decades, only one Chinese bank--the Taiwan government-owned Bank of Canton--served the entire West Coast. But in 1961, a group of Chinese entrepreneurs opened banks in San Francisco, Los Angeles and Seattle. The growth of Chinese immigration since then has led to a boom in this arena. Now, California’s dynamic Chinese immigrant communities are served by 36 locally owned Chinese ethnic financial institutions, not including the local branches of foreign banks. The leading southern California banks, ranked by assets, in billions of dollars:

East West: $1.30

General: $1.05

Cathay: $0.96

Far East National: $0.40

American International: $0.30

United National: $0.22

Preferred: $0.20

International Bank of California: $0.14

Omni: $0.12

First Central: $0.12

Source: East West Bank