(This was originally published in Taiwan News)

At a time when the central government is bowing out of the fiercely competitive banking sector, it seems rather odd that the Central Investment Holding Co., one of seven business arms of the KMT, is rushing into it through a new co-invested bank, the Universal Commercial Bank.

This is the latest in a series of investments which bares a fundamental reworking of the business strategy of companies linked with what is widely considered as the richest political party in the world. The KMT Business Management Committee, which looks after day-to-day operations of the party's holding companies, is suddenly taking to heart conventional business wisdom that dictates shoring up one's core competencies. The committee says it is moving away from majority ownership toward joint ventures for "better management" and higher returns on capital.

From another perspective, the move could be seen as the ruling party's response to mounting pressure for it to untangle itself from big business. Its current cozy business ties serve to fuel corruption allegations that hurt both the party and its invested companies. But the future of such an arrangement is cloudy. New rules either already in place or in the process of being drafted at the legislature threaten to crimp the KMT's business operations.

A ranking Central Investment Holding Co. official told The China News recently that his company would inject 15 percent of the capitalization for Universal Commercial. The new bank's initial paid-in capital amounts to over NT$10 billion. In order to raise funds, the Central Investment Holding Co. is mulling the sale of what is left of its holding in another bank, Sinopac. It still owns a five percent share in the latter even if it has divested previously-held shares over the past five months. The holding firm no longer keeps a seat on the board of directors.

The official said Universal Commercial fits in with the holding company's - and the KMT's - drive toward a greater presence overseas. This bank is by no means its first stab at universal banking. Sinopac found a beachhead in the US market by buying the floundering, California-based Far East National for US$94 million in August last year. The acquisition has given it the widest US network, albeit limited, to the West Coast.

The Central Investment Holding's pulling out of Sinopac may be prompted by several factors, not least being a profit motive. But it would make sense also from the point of view of political expediency. Sinopac's purchase of Far East National, after all, made it inherit the latter's three-man representative office in Beijing. That is problematic because of the hard-line stance of the central government, underscored by President Lee Teng-hui this week, against major Taiwan investments, especially in the financial industry, in China.

In the meantime, Sinopac is planning to issue two million new shares, at NT$15 apiece, on August 5. Bank officials claim the funds to be raised then will be set aside for long-term investments.


KMT As Stigma

A slightly different investment case is that of the China Development Corp. (CDC), which has figured in the news lately for its participation in bids for the island's two biggest railway projects. Miffed at insinuations that the company has been pulling strings to bag public contracts, its management has said it is deliberately trying to dispose of its KMT-held shares. This whittling down of KMT equity is evident during the past few years. Four years ago, the KMT held a 12 percent share in the investment cum industrial bank. According to a KMT Business Management Committee official, that is now down to a mere five percent.

The very vocal Liu Tai-ying, concurrently chairman of the CDC and the KMT Business Management Committee, says he wants to dissociate the CDC's business ventures from party politics. This new thinking is compatible with a proposal lodged two years ago with the National Development Council for the framing of an ethical code for the separation of political parties and party-related companies.

All told, KMT majority-owned companies number not more than 25, say KMT sources. But this number is dwindling with the party encouraging these businesses to chase a public listing on either the Taiwan main board or over-the-counter stock market. The KMT Business Management Committee has come up with a compelling reason for this situation. The party's investment firms are primarily venture capitalists. As such, their role is to nurture companies until they are stable enough to generate profits from initial public offerings.

The flight of KMT money from major companies is highlighted in three major cases. Central Investment Holding has sold half of its shares in party mouthpiece China Television. Kuang Hwa Investment Holding Co., another holding firm, has unloaded all but two percent of the KMT's stake in the United World Chinese Bank. Finally, the Central Investment Holding Co. let go of all its shares in the Central Insurance Co. in the open market last month.

Just how efficient is the KMT's business machine in choosing investments and, more important, in maximizing returns? Surprisingly, it has picked more winners than losers in its portfolio. KMT sources say its seven investment firms, on the average, yield from 15 to 20 percent rate of return annually. That is comparable to the performance of the best equity funds last year. But it falls short of the rate of return of some microchip makers (30 percent last year).

As a provider of funds for the day-to-day operations of the party, the various KMT businesses collectively outshoot expectations. A KMT source says the KMT Business Management Committee funneled a little over NT$5 billion into party coffers last year. That is a mere third of its pre-tax profits, NT$16.1 billion, in the same period.

The same source plays down the size of the committee's contribution, saying that four-fifths of that is allotted to workers' pay, insurance and pension allocations. That is not entirely far-fetched. The KMT, after all, employs a bureaucracy second only to the central government's in extension. More than a tenth of the island's population, in fact, are card-carrying members.


Undermining Clout

In the 1940s, mail-fisted, one-party rule made it possible for the National Representatives' Conference to lay out the makings of a business empire with an end to fill up party coffers. But half a century later, the remnant of the Republic of China on Taiwan is a thoroughgoing democracy in which the KMT business machine seems both outdated and excessive. During the past five years, attempts have been made to curb its power.

A minor, initial success was the recently-passed Government Procurement Law, which will govern the awarding of public infrastructure contracts once it takes effect next year. Article 38 of that law states thus, "A supplier whose responsible personnel, director, or supervisor is a representative of a political party shall not participate in tendering."

But the force of that regulation is blunted by an accompanying note that the interpretation of the law is "subject to a decision by the plenary session of the legislature." This can hardly be expected to be used against the KMT since its lawmakers outnumber those of the opposition New Party and the DPP by about ten. In any case, another legislation, the Company Law, defines a party-related company to be one whose majority shares or more than half of whose directors' seats are held by a party. None of the major, KMT-invested construction firms falls under that category.

The opposition nonetheless is not easily daunted. DPP lawmakers Lin Jo-shuei, Ko Chien-ming and Yu Ling-ya as well as New Party legislator William Tsai routinely draft amendments to the Political Party Funding Act and the People's Organization Law which could clip some of the apparent privileges of the ruling party. The KMT's dominance of the legislature, however, is such that all their efforts at reform are squashed even before going past the first reading.

This state of affairs, though, could change dramatically in the next few years, according to economic and political analysts. A rupture in party-business ties could occur ultimately when the opposition succeeds in wresting political control.

"The DPP and a lot of other people are challenging the KMT's ownership of businesses," says Wu Pei-ru, an analyst with Core Pacific Securities. "If they can win in legislative and local elections, it'll be dangerous. The ruling party has to sell shares in a hurry."