From Wikipedia, the free encyclopedia

A structured settlement factoring transaction describes the selling of future structured settlement payments (or, more accurately, rights to receive the future structured settlement payments). People who receive structured settlement payments (for example, the payment of personal injury damages over time instead of in a lump sum at settlement) may decide at some point that they need more money in the short term than the periodic payment provides over time. People's reasons are varied but can include unforeseen medical expenses for oneself or a dependent, the need for improved housing or transportation, education expenses and the like. To meet this need, the structured settlement recipient can sell (or, less commonly, encumber) all or part of their future periodic payments for a present lump sum.

History

Structured settlements experienced an explosion in use beginning in the 1980s.[1] The growth is most likely attributable to the favorable federal income tax treatment such settlements receive as a result of the 1982 amendment of the tax code to add § 130.[2] [3] Internal Revenue Code § 130 provides, inter alia, substantial tax incentives to insurance companies that establish “qualified” structured settlements.[4] There are other advantages for the original tort defendant (or casualty insurer) in settling for payments over time, in that they benefit from the time value of money (most demonstrable in the fact that an annuity can be purchased to fund the payment of future periodic payments, and the cost of such annuity is far less than the sum total of all payments to be made over time). Finally, the tort plaintiff also benefits in several ways from a structured settlement, notably in the ability to receive the periodic payments from an annuity that gains investment value over the life of the payments, and the settling plaintiff receives the total payments, including that “inside build-up” value, tax-free.[5]
However, a substantial downside to structured settlements comes from their inherent inflexibility.[6] To take advantage of the tax benefits allotted to defendants who choose to settle cases using structured settlements, the periodic payments must be set up to meet basic requirements [set forth in IRC 130(c)]. Among other things, the payments must be fixed and determinable, and cannot be accelerated, deferred, increased or decreased by the recipient.[7] For many structured settlement recipients, the periodic payment stream is their only asset. Therefore, over time and as recipients’ personal situations change in ways unpredicted at the settlement table, demand for liquidity options rises. To offset the liquidity issue, most structured settlement recipients, as a part of their total settlement, will receive an immediate sum to be invested to meet the needs not best addressed through the use of a structured settlement. Beginning in the late 1980s, a few small financial institutions started to meet this demand and offer new flexibility for structured settlement payees.[8] In April 2009, financial writer Suze Orman wrote in a syndicated column [1] that selling future structured settlement payments "is tempting but it's typically not smart."

[edit] Process

[edit] Pre-2002

Congress enacted law to provide special tax breaks for payments received by tort victims in structured settlements, and for the companies that funded them. The payments were tax free, whereas if the tort victim had been given a lump sum and invested it themselves, the payments from those investments would be taxable.
Companies liked structured settlements because it allowed them to avoid taxes to a certain extent, and plaintiffs liked them because it allowed them to receive tax-free payments of what became, over time, a much larger amount of money than the original amount paid out by the settling party. Such settlements were also considered an especially good idea for minors, as they held the money safe for adulthood and ensured that youth would not find the money wasted or ill-spent. “Despite the best intentions of plaintiffs, lump sum settlement awards are often quickly dissipated because of excessive spending, poor financial management, or a combination of both. Statistics showed that twenty-five to thirty percent of all cash awards are exhausted within two months, and ninety percent are exhausted within five years.” Andrada, “Structured Settlements – The Assignability Problem,” 9 S. Cal. Interdis. L.J. 465, 468 (Spring 2000).
An explanation of IRS Code section 130 was given during discussions of possible taxation of companies that bought future payments under those structured settlements. “By enacting the PPSA, Congress expressed its support of structured settlements, and sought to shield victims and their families from pressures to prematurely dissipate their recoveries.” 145 Cong. Rec. S52281-01 (daily ed. May 13, 1999) (statement of Sen. Chaffee).
Congress was willing to afford such tax advantages based on the belief that the loss in income taxes would be more than made up by lower expenditures on public assistance programs for those who suffered significant injuries. A strict requirement for a structured settlement to qualify for this tax break was that the tort victim was barred from accessing their periodic payments before they came due. It was for this reason that the annuity had to be owned by another who had control over it. The tort victim could not be seen to have “constructive receipt” of the annuity funds prior to their periodic payments. If the tort victim could cash in the annuity at any time, it was possible that the IRS might find constructive receipt.
“Congress conditioned the favorable rules on a requirement that the periodic payments cannot be accelerated, deferred, increased or decreased by the injured person. Both the House Ways and Means and Senate Finance Committee Reports stated that the periodic payments as personal injury damages are still excludable fro income only if the recipient is not in constructive receipt of or does not have the current economic benefit of the sum required to produce the periodic payments.”
Testimony of Tax Legislative Counsel Joseph M. Mikrut to the Subcommittee on Oversight of the Committee of Ways and Means, March 18, 1999. “These factoring transactions directly undermine the policy objective underlying the structured settlement tax regime, that of protecting the long term financial needs of injuries persons . . . “ (Id.)
Mr. Mikrut was testifying in favor of imposing a punitive tax on factoring companies that engaged in pursuit of structured settlement payments. Despite the use of non-assignment clauses in annuity contracts to secure the tax advantages for tort victims. companies cropped up that tried to advantage of these individuals in ”factoring” transactions, purchasing their periodic payments in return for a deeply discounted lump sump payment. Congress felt that factoring company purchases of structured settlement payments “so directly subvert the Congressional policy underlying structured settlements and raise such serious concerns for the injured victims,” that bills were proposed in both the Senate and the House to penalize companies which engage in such transactions. (Id.)
Before the enactment of IRC 5891, which became effective on July 1, 2002, some states regulated the transfer of structured settlement payment rights, while others did not. Most states that regulated transfers at this time followed a general pattern, substantially similar to the present day process which is mandated in IRC 5891 (see below for more details of the post-2002 process). However, the majority of the transfers processed from 1988 to 2002 were not court ordered.[9] After negotiating the terms of the transaction (including the payments to be sold and the price to be paid for those payments), a formal purchase contract was executed, effecting an assignment of the subject payments upon closing. Part of this assignment process also included the grant of a security interest in the structured settlement payments, to secure performance of the seller’s obligations. Filing a public lien based on that security agreement created notice of this assignment and interest. The insurance company issuing the structured settlement annuity checks was typically not given actual notice of the transfer, due to antagonism by the insurance industry against factoring and transfer companies. Many annuity issuers were concerned that factoring transactions, which were not contemplated when Congress enacted IRC 130, might upset the tax treatment of qualified assignments. HR 2884 (discussed below) resolved this question for annuity issuers.

[edit] Federal legislation

In 2001, Congress passed HR 2884, signed into law by the President in 2002 and effective July 1, 2002, codified at Internal Revenue Code § 5891.[10] Through a punitive excise tax penalty, this has created the de facto regulatory paradigm for the factoring industry. In essence, to avoid the excise tax penalty, IRC 5891 requires that all structured settlement factoring transactions be approved by a state court, in accordance with a qualified state statute. Qualified state statutes must make certain baseline findings, including that the transfer is in the best interest of the seller, taking into account the welfare and support of any dependents. In response, many states enacted statutes regulating structured settlement transfers in accord with this mandate.

[edit] Post-2002

Today, all transfers are completed through a court order process. As of November 11, 2008, 46 states(Laws). have transfer laws in place regulating the transfer process. Of these, 41 are based in whole or in part on the model state law enacted by NCOIL, the National Conference of Insurance Legislators (or, in cases when the state law predates the model act, they are substantially similar).
Most state transfer laws contain similar provisions, as follows: (1) pre-contract disclosures to be made to the seller concerning the essentials of the transaction; (2) notice to certain interested parties; (3) an admonition to seek professional advice concerning the proposed transfer; and (4) court approval of the transfer, including a finding that it is in the best interest of seller, taking into account the welfare and support of any dependents.

[edit] Controversy Concerning "Servicing" of Structured Settlement Payments by Factoring Companies

Servicing of structured settlement payments occurs when a structured settlement payee sells only a portion of their future structured settlement payment rights, yet concurrent with the transfer, the factoring company also enters into an agreement to "service" the structured settlement payments that have not been sold. In "servicing" practice, one check is made payable to the factoring company instead of one to the factoring company and one to the payee. The factoring company receives the entire structured settlement payment, when due from the annuity issuer, takes what is owed to it and "passes through" the balance to the payee. This involves issuing a separate check to the payee issued off the factoring company account. Further it has been alleged that annuity issuers will not address questions of payees whose payments are subject to a servicing agreement. Some factoring industry commentators suggest the reason for this phenomenon is that some structured annuity issuers will not "split" annuity payments (i.e. make payments to more than one place)ostensibly to save administrative cost. Others say that the practice is driven by the factoring companies simply as a means to secure new business. Several industry commentators have expressed concerns questioned whether such servicing agreements are in the structured settlement payee's "best interest". What they say needs to be addressed is what effect the bankruptcy of a factoring company "servicing company" would have on the payee, with respect to the payments being serviced. Until this issue is decided, payees who are considering partial structured settlement transfers should be wary about participating in "servicing agreements". One possible solution has been suggested-that there be a requirement that servicing companies post a bond.

[edit] Factoring Terminology

[edit] Best Interest Standard

Internal Revenue Code Sec. 5891 and most state laws require that a court find that a proposed settlement factoring transaction be in the best interest of the seller, taking into account the welfare and support of any dependents. [11] “Best interest” is generally not defined, which gives judges flexibility to make a subjective determination on a case-by-case basis. Some state laws may require that the judge look at factors such as the “purpose of the intended use of the funds,” the payee’s mental and physical capacity, and the seller’s potential need for future medical treatment. [12] [13]. One Minnesota court described the “best interest standard” as a determination involving “a global consideration of the facts, circumstances, and means of support available to the payee and his or her dependents.” [14]
Courts have consistently found that the “best interest standard” is not limited to financial hardship cases. [15] Hence, a transfer may be in a seller’s best interest because it allows him to take advantage of an opportunity (i.e., buy a new home, start a business, attend college, etc.) or to avoid disaster (i.e., pay for a family member’s unexpected medical care, pay off mounting debt, etc.). For example, a New Jersey court found that a transaction was in a seller’s best interest where the funds were used to “pay off bills…and to buy a home and get married.” [16]
Although sometimes criticized for being vague, the best interest standard’s lack of precise definition allows considerable latitude in judicial review. Courts can consider on a case-by-case basis the totality of the circumstances surrounding the transfer to determine whether it should be approved.

[edit] Discount Rate

In the beginning, the factoring industry had some relatively high discount rates due to heavy expenses caused by costly litigation battles and limited access to traditional investors. However, once state and federal legislation was enacted, the industry’s interest rates decreased dramatically. There is much confusion with the terminology “discount rate” because the term is used in different ways. The discount rate referred to in a factoring transaction is similar to an interest rate associated with home loans, credit cards and car loans where the interest rate is applied to the payment stream itself. In a factoring transaction, the factoring company knows the payment stream they are going to purchase and applies an interest rate to the payment stream itself and solves for the funding amount, as though it was a loan. Discount rates from factoring companies to consumers can range anywhere between 8% up to over 18% but usually average somewhere in the middle (link to a discount rate calculator can be found here). Factoring discount rates can be a bit higher when compared to home loan interest rates, due to the fact the factoring transactions are more of a boutique product for investors opposed to the mainstream collateralized mortgage transactions. One common mistake in calculating the discount rate is to use “elementary school math” where you take the funding/loan amount and divide it by the total price of all the payments being purchased. Because this method disregards the concept of time (and the time value of money), the resulting percentage is useless. For example, the court in In Re Henderson Receivables Origination v. Campos noted an annual discount rate of 16.8% where the annuitant received $36,500 for the assignment of payments totaling $63,364.94 over 84 months (two monthly payments of $672.32 each, beginning September 30, 2006 and ending on October 31, 2006; eighty-two monthly payments of $692.49 each, increasing 3% every twelve months, beginning on November 30, 2006 and ending on August 31, 2013). However, had the court in Henderson Receivables Origination applied the illogical formula of discounting from “elementary school math” ($36,500/ $63,364.94), the discount rate would have been an astronomical (and nonsensical) 61%. [17]

[edit] Discounted Present Value

Another term commonly used in factoring transactions is “discounted present value,” which is defined in the NCOIL model transfer act as “the present value of future payments determined by discounting such payments to the present using the most recently published Applicable Federal Rate for determining the present value of an annuity, as issued by the United States Internal Revenue Service.” [18] The IRS discount rate, also known as the Applicable Federal Rate (AFR), is used to determine the charitable deduction for many types of planned gifts, such as charitable remainder trusts and gift annuities. The rate is the annual rate of return that the IRS assumes the gift assets will earn during the gift term. The IRS discount rate is published monthly (link to current rate may be found here). In Henderson Receivables Origination (above), the court calculated the discounted present value of the $63,364.94 to be transferred as $50,933.18 based on the applicable federal rate of 6.00%. [18] The “discounted present value” is a measuring stick for determining what the value of a future payment (i.e., a payment that is due in the year 2057) is today. Hence, the discounted present value of a payment corrects for inflation and the principle that money available today is worth more than money not accessible for 50 years (or some future time). However, the discounted present value is not the same thing as market value (what someone is willing to pay). Basically, a calculation that discounts a future payment based on IRS rates is an artificial number since it has no bearing on the payment’s actual selling price. For example, in Henderson Receivables Origination, it is somewhat confusing for the court to evaluate future payments totaling $63,364,94 based the discounted present value of $50,933.18 because that is not the market value of the payments. In other words, the annuitant couldn’t go out and get $50,933.18 for his future payments because no person or company would be willing to pay that much. Some states will require a quotient to be listed on the disclosure that is sent to the customer prior to entering into a contract with a factoring company. The quotient is calculated by dividing the purchase price by the discounted present value. The quotient (like the discounted present value) provides no relevance in the pricing of a settlement factoring transaction. In Henderson Receivables Origination (above), the court did consider this quotient which was calculated as 71.70% ($36,500/ $50,933.18). [19]

From Wikipedia, the free encyclopedia
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Hong Kong (Chinese: 香港, Xiānggǎng, Cant. Heunggong), officially the Hong Kong Special Administrative Region,[7] is a largely self-governing[8] territory of the People's Republic of China, facing Guangdong to the north and the South China Sea to the east, west and south. Hong Kong is a global metropolitan and international financial centre, and has a highly developed capitalist economy.

Beginning as a trading port, Hong Kong became a crown colony of the United Kingdom in 1842, reclassified as a British dependent territory in 1983, and remained so until the transfer of its sovereignty to the People's Republic of China in 1997.[9][10] Under the "one country, two systems" policy,[11] Hong Kong enjoys a high degree [12] of autonomy in all areas with the exception of foreign affairs and defence, which are the responsibility of the PRC Government.[8] As part of this arrangement, Hong Kong continues to maintain its own currency, legal system, political system, immigration control, rule of the road and other aspects that concern its way of life,[8] many of which are distinct from those of mainland China.[13][14][15][16]

Renowned for its expansive skyline and natural setting, its identity as a cosmopolitan centre where the East meets the West is reflected in its cuisine, cinema, music and traditions.[17] The city's population is 95% Chinese and 5% people of other ethnicities.[18] With a population of 7 million people but land area of 1,108 km2 (428 sq mi), Hong Kong is one of the most densely populated areas in the world.[19]
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Etymology
The name "Hong Kong" in the English language is an approximate phonetic rendering of the Cantonese or Hakka pronunciation of the spoken Cantonese name "香港", meaning "fragrant harbour".[20]

Before 1842, the name Hong Kong originally referred colloquially to a small inlet (now Aberdeen Harbour/Little Hong Kong) between the island of Ap Lei Chau and the south side of the island which later became known as Hong Kong. The inlet was one of the first points of contact between British sailors and local fishermen.[21] The reference to fragrance may refer to the harbour waters sweetened by the fresh water esturine influx of the Pearl River, or to the incense factories lining the coast to the north of Kowloon which was stored around Aberdeen Harbour for export, before the development of Victoria Harbour.[20]

In 1842, the Treaty of Nanking was signed, and the name Hong Kong was first recorded on official documents to encompass the entirety of the Island.[22] The Convention of Peking (1860) and Convention for the Extension of Hong Kong Territory (1898) added the Kowloon peninsula and New Territories into Hong Kong's territory, which has remained unchanged until the present.
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History
Human settlement in the area now known as Hong Kong dates back to the late Paleolithic and early Neolithic era,[23] but the name Hong Kong (香港) did not appear on written record until the Treaty of Nanking of 1842.[24] The area's earliest recorded European visitor was Jorge Álvares, a Portuguese explorer who arrived in 1513.[25][26]

In 1839 the refusal by Qing Dynasty authorities to import opium resulted in the First Opium War between China and Britain. Hong Kong Island became occupied by British forces in 1841, and was formally ceded to Britain under the Treaty of Nanking at the end of the war. The British established a Crown Colony with the founding of Victoria City the following year. In 1860, after China's defeat in the Second Opium War, Kowloon Peninsula south of Boundary Street and Stonecutter's Island were ceded to Britain under the Convention of Peking. In 1898 Britain obtained a 99-year lease of Lantau Island and the adjacent northern lands, which became known as the New Territories.[27]
Hong Kong in the late nineteenth century was a major trading post of the British Empire.
Japanese troops enter Hong Kong and march on Queen's Road led by Lieutenant General Takashi Sakai and Vice Admiral Masaichi Niimi in December 1941, after the British surrender. (Photo courtesy of Imperial War Museum, UK.)

During the first half of the 20th century, Hong Kong was a free port, serving as an entrepôt of the British Empire. The British introduced an education system based on their own model, while the local Chinese population had little contact with the European community of wealthy tai-pans settled near Victoria Peak.[27]

In conjunction with its military campaign in World War II, the Empire of Japan invaded Hong Kong on 8 December 1941. The Battle of Hong Kong ended with British and Canadian defenders surrendering control of the colony to Japan on 25 December. During the Japanese occupation, civilians suffered widespread food shortages, rationing, and hyper-inflation due to forced exchange of currency for military notes. Hong Kong lost more than half of its population in the period between the invasion and Japan's surrender in 1945, when the United Kingdom resumed control of the colony.[28]

Hong Kong's population recovered quickly as a wave of mainland migrants arrived for refuge from the ongoing Chinese Civil War. With the proclamation of the People's Republic of China in 1949, more migrants fled to Hong Kong in fear of persecution by the Communist Party.[27] Many corporations in Shanghai and Guangzhou also shifted their operations to Hong Kong.[27] The colony became the sole place of contact between mainland China and the Western world, as the Chinese communist government increasingly isolated itself from outside influence.

As textile and manufacturing industries grew with the help of population growth and low cost of labour, Hong Kong rapidly industrialised, with its economy becoming driven by exports, and living standards rising steadily. The construction of Shek Kip Mei Estate in 1953 marked the beginning of the public housing estate program, designed to cope with the huge influx of immigrants. Trade in Hong Kong accelerated even further when Shenzhen, immediately north of Hong Kong, became a Special Economic Zone of the PRC, and established Hong Kong as the main source of foreign investment to the mainland. The later decades of the 20th century saw the economy shift from textiles and manufacturing to mainly services-based, as the financial and banking sectors became increasingly dominant.

With the lease of the New Territories due to expire within two decades the governments of the United Kingdom and the People's Republic of China discussed the issue of Hong Kong's sovereignty in the 1980s. In 1984 the two countries signed the Sino-British Joint Declaration, agreeing to transfer sovereignty to the People's Republic of China in 1997,[27] and stipulating that Hong Kong would be governed as a special administrative region, retaining its laws and a high degree of autonomy for at least fifty years after the transfer. The Hong Kong Basic Law, which would serve as the constitutional document after the transfer, was ratified in 1990, and the transfer of sovereignty occurred at midnight on 1 July 1997, marked by a handover ceremony at the Hong Kong Convention and Exhibition Centre.[27]

Hong Kong's economy was affected by the Asian financial crisis of 1997 that hit many East Asian markets, and the lethal H5N1 avian influenza also surfaced that year. After a gradual recovery, Hong Kong suffered again due to an outbreak of SARS in 2003.[29] Today, Hong Kong continues to serve as an important global financial centre, but faces uncertainty over its future role with a growing mainland China economy, and its relationship with the PRC government in areas such as democratic reform and universal suffrage.

The Republic of China (ROC), commonly known as Taiwan, is a state in East Asia that has evolved from a single-party state with full global recognition and jurisdiction over China into a democratic state with limited international recognition and jurisdiction only over Taiwan and minor islands, though it enjoys de facto relations with many other states. It was a founding member of the United Nations[11] and one of the five permanent members of the UN Security Council, until being replaced by the People's Republic of China in 1971.

Established in 1912, the Republic of China encompassed much of mainland China and Mongolia. At the end of World War II, with the surrender of Japan, the Republic of China added the island groups of Taiwan and Penghu to its jurisdiction. When the Kuomintang (KMT), the Chinese Nationalist Party, lost the civil war to the Communist Party in 1949, it relocated to Taiwan and established Taipei as the ROC's provisional capital; while the Communists founded the People's Republic of China (PRC) in mainland China. Taiwan, together with Penghu, Kinmen, Matsu and other minor islands then became the extent of the Republic of China's authority. Although its jurisdiction only covers this area, during the early Cold War the ROC was recognized by many Western nations and the United Nations as the sole legitimate government of China.

Constitutionally, the ROC has not relinquished its claim as the legitimate government of all China although in practice it does not actively pursue these claims.[12] The political parties of the ROC often have radically different views regarding the sovereignty of Taiwan. Both former Presidents Lee Teng-hui and Chen Shui-bian have held the view that it is a sovereign and independent country separate from mainland China and there is no need for a formal declaration of independence.[13] President Ma Ying-jeou has expressed the view that the ROC is a sovereign and independent country that includes both Taiwan and mainland China.[14]

The ROC is a democracy with a semi-presidential system and universal suffrage. The president serves as the head of state and the Legislative Yuan serves as legislative body. One of the Four Asian Tigers, Taiwan is the 26th-largest economy in the world.[15] Its technology industry plays a key role in the global economy. The ROC is ranked high in terms of freedom of press, health care, public education and economic freedom, among others.
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Names
Despite being currently located in Taiwan, the ROC started its existence in China and thus is officially called "Republic of China". Shortly after its establishment in 1912, while it was still located on the Asian mainland, the government used the abbreviation "China" ("Zhongguó") to refer to itself, for instance during the Olympic Games[16] or at the United Nations. During the 1950s and 1960s, it was common to refer to it as "Nationalist China" to differentiate from the "Communist China" on the Asian mainland.[17] At the UN, it was present under the name "China" until it lost its seat to the People's Republic of China. Since then, the name "China" has been commonly used to refer only to the People's Republic of China.[18]

Over subsequent decades, the Republic of China has been commonly known as "Taiwan", which comes from Tayuan or Tayoan in the Siraya language.
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History
The Republic of China was established in 1911, replacing the Qing Dynasty and ending over two thousand years of imperial rule in China. It is the oldest surviving republic in East Asia. The Republic of China on mainland China went through periods of warlordism, Japanese invasion, and civil war between the Kuomintang and the Communists. The Republic of China on Taiwan has experienced rapid economic growth and industrialization, and democratization.

Starting in 1928, the Republic of China was ruled by the Kuomintang as an authoritarian one-party state.[19] In the 1950s and 1960s, the KMT went through wide restructuring and decreased corruption and implemented land reform. There followed a period of great economic growth, the Republic of China became one of the Four Asian Tigers, despite the constant threat of war and civil unrest. In the 1980s and 1990s the government peacefully transitioned to a democratic system, with the first direct presidential election in 1996 and the 2000 election of Chen Shui-bian, the first non-KMT after 1949 to become President of the Republic of China. The KMT regained presidency and increased its majority in the legislature in the 2008 presidential and legislative elections.[20]
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Economy
The quick industrialization and rapid growth of Taiwan during the latter half of the twentieth century, has been called the "Taiwan Miracle" or "Taiwan Economic Miracle". As it has developed alongside Singapore, South Korea and Hong Kong, the ROC is one of the industrialized developed countries known as the "Four Asian Tigers".

By 1945, hyperinflation was in progress in China and Taiwan as a result of the war with Japan. To isolate Taiwan from it, the Nationalist government created a new currency area for the island, and started a price stabilization program. These efforts helped significantly slow the inflation. In 1950, with the outbreak of the Korean War, the US began an aid program which resulted in fully stabilized prices by 1952.[119] The KMT government instituted many laws and land reforms that it had never effectively enacted on mainland China; it implemented a policy of import-substitution, and it attempted to produce imported goods domestically. Much of this was made possible through US economic aid, subsidizing the higher cost of domestic production.

Today the Republic of China has a dynamic capitalist, export-driven economy with gradually decreasing state involvement in investment and foreign trade. In keeping with this trend, some large government-owned banks and industrial firms are being privatized.[120] Real growth in GDP has averaged about 8 percent during the past three decades. Exports have provided the primary impetus for industrialization. The trade surplus is substantial, and foreign reserves are the world's third largest.[121] The Republic of China has its own currency, the New Taiwan dollar.

Since the beginning of the 1990s, the economic ties between the ROC and the PRC have been very prolific. As of 2005, $50 billions (USD) have been invested in China by Taiwanese companies, and about 1 million Taiwanese live in China often to run their own business. Although this is generally good for the economy of Taiwan, some Taiwanese have expressed worries about this situation, arguing that the island has become increasingly dependent on the economy of China. Others believe it is a positive thing, because it would make any military intervention by the PRC against Taiwan very costly for China, and therefore less probable.[122]

In 2001, Agriculture constitutes only 2 percent of GDP, down from 35 percent in 1952.[123] Traditional labor-intensive industries are steadily being moved offshore and with more capital and technology-intensive industries replacing them. The ROC has become a major foreign investor in the PRC, Thailand, Indonesia, the Philippines, Malaysia, and Vietnam. It is estimated that some 50,000 Taiwanese businesses and 1,000,000 businesspeople and their dependents are established in the PRC.[124]

Because of its conservative financial approach and its entrepreneurial strengths, the ROC suffered little compared with many of its neighbors from the 1997 Asian Financial Crisis. Unlike its neighbors South Korea and Japan, the Taiwanese economy is dominated by small and medium sized businesses, rather than the large business groups. The global economic downturn, however, combined with poor policy coordination by the new administration and increasing bad debts in the banking system, pushed Taiwan into recession in 2001, the first whole year of negative growth since 1947. Due to the relocation of many manufacturing and labor intensive industries to the PRC, unemployment also reached a level not seen since the 1970s oil crisis. This became a major issue in the 2004 presidential election. Growth averaged more than 4 percent in the 2002–2006 period and the unemployment rate fell below 4 percent.[125]

The ROC often joins international organizations under a politically neutral name. The ROC is a member of governmental trade organizations such as the World Trade Organization under the name Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu (Chinese Taipei) since 2002.[126]