TAIWAN: THE IMPACT OF THE 10TH CREDIT SCANDAL

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T01058R000201830001-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 5
• Document Creation Date: December 22, 2016
• Document Release Date: November 30, 2009
• Sequence Number: 1
• Publication Date: September 6, 1985
• Content Type: REPORT

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Len ra intelligence ncy 14 3 iytt.4
DIRECTORATE OF INTELLIGENCE
06 September 1985
Taiwan: The Impact of the 10th Credit Scandal
Summary
The Yu Kuo-hua administration is still feeling the
effects of the collapse of the 10th Credit Cooperative Bank
in February. Two cabinet ministers have resigned and more
officials suspected of malfeasance are expected to be
dismissed. Meanwhile, the scandal has increased doubts
about the government's ability to manage the economy and
added to the island's mounting economic woes. We expect
President Chiang to reorganize the cabinet and replace
Premier Yu sometime after this fall's provincial elections
an effort to restore public confidence in the government.
Li Huan--a reformer--probably is the front runner to replace
Yu, but the nod could go to another conservative. Indeed,
Chiang's plans for ensuring a smooth presidential
This memorandum was prepared by~~Foreign
Affairs Branch, China Division, Office of East Asian Analysis.
It was coordinated with Directorate of Operations. Research was
completed on 26 August 1985. Comments and questions are welcome
and should be addressed to Chief, China Division, OEA
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succession, which he has kept to himself, are likely to
influence his final choices for the next government as much
as the state of the economy.
Political Ramifications
The widening scandal surrounding the collapse last February
of the 10th Credit Cooperative Bank has--in our view--dealt a
crippling blow to the1already badly tarnished administration of
Premier Yu Kuo-hua's. The unearthing of widespread official
corruption has already forced the resignations of Kuomintang
(KMT) Secretary-General Chiang Yen-shih and the Economic Affairs
and Finance ministers. In addition, several lower level
financial officials have been dismissed.
The government has tried to limit the damage by promising
swift punishment for those involved. The authorities probably
hoped that the resignations of two cabinet ministers and the
highly publicized reprimands of other finance and banking
officials would mollify the public and quickly close the books on
the incident. But that is not likely.
the Chairman of the KMI Provincial
Headquarters and the Speaker of the Taiwan Provincial Assembly
also may lose their jobs. Even Premier Yu, who until 1984 was
Chairman of the Central Bank that regulates the banking system,
is widely believed to have participated in an attempted coverup
Economic Slowdown Compounds Problem
The collapse of the 10th Cooperative has had serious
economic side effects, triggering runs on several other privately
owned lending institutions. Other larger banks in turn have
adopted tighter credit policies after being reprimanded by the
government for questionable lending practices. The net result is
that many small-and medium-sized firms, accustomed to easy access
to credit, are now going bankrupt. Even some large conglomerates
1 In addition to the 10th Credit, the Yu administration has come
under fire fora series of mine disasters since last summer and
official Taiwan involvement in the murder of Chinese-American
writer Henry Lui last October.
2 The 10th Cooperative collapsed after the public disclosure of
illegal banking practices including massive unbacked loans.
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The credit squeeze has contributed to a general slowdown in
the economy caused in large part by factors beyond the
government's control. The sluggish US economy has hit Taiwan's
export industries particularly hard. Taiwan, moreover, is facing
stiffer competition from countries whose cheaper labor costs
allow. them to undercut the prices of Taiwan's exports.
The faltering economy has focused even more unfavorable
public attention on the Yu government. Indeed, its failure to
adopt more stringent financial controls to prevent the kind of
abuses exemplified by the 10th Cooperative scandal is symptomatic
of Yu's weak leadership in dealing with deeper systemic problems
in the economy. The government for example, has been slow to
consider tax reforms that would encourage Taiwan's export sector
to invest in more technology-intensive industries. Taipei has
also been very reluctant to open the island
to foreign i
nvestor
s,
even those willing to transfer technologies
and contribu
te to R
&
D expenditures.
To restore business confidence in its policies the cabinet
has recently cut taxes, loosened controls on foreign exhange and
lowered electricity prices for major firms. At the premier's
initiative, the government also has established an Economic
Reform Committee, which includes a number of highly respected
Taiwanese businessmen. These steps, however, are widely regarded
as stop gap measures and have done little to defuse criticism of
the goverment's failure to initiate much needed economic
reforms. local 25X1
businessmen are now publicly deriding the Premier, characterizing
him as a "Typhoid Mary" who damages everything he touches.F___-] 25X1
Looking to the Fall Elections
We believe opposition forces will try to capitalize on the
economic slump, the scandal and other setbacks to the government
to chip away at the Kuomintang's dominant position in the
provincial elections scheduled for November and December. The
KMT seems resigned to losing some seats, but party officials
remain confident that the KMT will still garner close to 75
percent of the popular vote. The opposition remains fractured
and without a strong core of leaders who can launch an effective
campaign against the extensive resources of the KMT. As a result
we believe many voters probably will remain convinced that
despite the Yu government's poor performance, only the KMT is
capable of turning the economy around.
And Beyond
Once the elections are over, President Chiang is likely in
our view to remove the hapless Yu and reorganize the cabinet--
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perhaps after the next.KMT plenum expected to be held in December
or January. Chiang is unlikely to move sooner because of the
embarrassment the removal of Yu--an old family adviser--would
cause the KMT and Yu personally. Moreover, Chiang probably will
want to wait and see who else is implicated in the 10th
Cooperative scandal before naming 'a new cabinet.
Several senior officials have been rumored to be in the
running to replace Yu. These include Minister of Education Li
Huan, Chairman of the Council of Economic Planning and
Development Chao Yao-tung, and Secretary General of the
Presidential Office, Shen Chang-huan. Li Huan, who is popular
within the party and with ecqnomic technocrats, seems to be the
odds on favorite at present. We believe the Taiwan business
community would support either Li or Chao, who are known to favor
reform. By contrast, Shen shares many of Yu's flaws. A
conservative on both political and economic issues, we doubt that
he would b
e willing to take the steps needed to improve the
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President Chiang, however, may have more confidence in Shen
to carry on the policies he favors. Over the past 18 months, for
example, Chiang has virtually delegated authority over foreign
policy to Shen. Shen's hand has been particularly visible in
Taiwan's decisions to:
--seek greater official status in the United States;
--refuse to use the "Olympic formula" to resolve
Taiwan's status in the Asian Development Bank;
--revert to an inflexible policy toward Raiiinn's
reunificiation overtures.
We also suspect--but are not certain--that Chiang is
closer to Shen than Li Huan in flavoring a very gradualist
approach to political reform and Taiwanization of the KMT. In
any event, we believe Chiang's calculations for ensuring that
power is in the "right hands" after his death will influence his
decision on the next government as much as--or perhaps even more
than--his concerns over the present state of the economy. Thus,
even if Chiang picks Li to succeed Yu, the President will
continue to rely heavily on Shen, who represents the conservative
wing of the KMT, to ensure a "balance" within the collegial
leadership likely to take over after he dies or retires.
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Subject: Taiwan: The Impact of the 10th Credit Scandal
Distribution:
1 -- James Lilley, Principal Deputy Assistant Secretary, Bureau
of East Asian and Pacific Affairs, Room 4318, Department
of State
Donald Anderson, Director,
Bureau of East Asian and
Department of State
Office of Chinese Affairs,
Pacific Affairs, Room 4318,
John J. Taylor, Director, Office of Analysis for East Asia
and the Pacific, Bureau of Intelligence and Research,
Room 8840, Department of State
Mark Pratt, Diector, EA/RA/Taiwan Coordination, Room 4312,
Department of State
James Kelley, Deputy Assistant Secretary for East Asian
and Pacific Affairs, Room 4E817, Pentagon
John Sloan, DIO for East Asia, Room 2C238, Pentagon
Ronald Montaperto, JSI-3A, Room 1C945, Pentagon
Byron Jackson, Office of Intelligence Liaison, Room
Department of Commerce
Robert Perito, Chief, China Office, East Aisan and
Pacific, Room2317, Department of Commerce
DDI (7E47)
Senior Review
D/OEA (4F18)
OEA/CH (4G32)
OEA/CH/DOM (4G32)
OEA/CH/DEF (4G32)
OEA/CH/DEV (4G32)
OEA/CH/FOR (4G32)
OEA/Production Staff
PDB Staff (7F15)
NIO/EA (7E47)
C/PES (7G15)
C/DO/PPS (3D01)
C/EA (5E18)
C/EA[-] (5D38)
DDO/EA
G
19)
OCR/IS
OCR/CH (1H18)
NIC/Analytical Group
OGI/ECD/IT (Attn:
CPAS/ILS ((7G15)
CPAS/IMS/CB (7G15)
(5GOO)
(4G48)
(7E47)
(5D54)
(3G46)
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DDI/OEA/CH/FOR/
(30 August 1985) 25X1
6854,
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