Bangkok--Mar 7--Aziam Burson-Marsteller
Three powerful forces remain: strong economic links with China, an
undervalued currency and ample liquidity at home.
Taiwan's leading economic index suggests strongly that the economy is slowing down. The index, which tends to lead GDP growth by about one
quarter, started turning down in May 2004, and the latest figure, for
December, still shows no sign of it bottoming. Right on cue, Taiwan's GDP
growth slowed from 7.9% y-o-y in 2Q 2004 to 5.3% in 3Q 2004, and we
forecast further slowing, to 3.7% in 4Q 2004 and 3.1% in this quarter. The
slowdown can be put down to a number of factors: high oil prices, weaker
global demand for electronic products, uncertainty ahead of Taiwan's
December elections, and lingering base effects relating to the impact of
SARS. However, we are confident the economy will start to recover in 2Q,
producing GDP growth of 5.0% for 2005.
Some of the aforementioned constraints have lessened but, more importantly, Taiwan's economy continues to be underpinned by three powerful forces: strong economic links with China, an undervalued currency, and ample
liquidity at home.
The hollowing out myth
Despite the political differences, Taiwan's economic integration with China's rapidly growing economy has increased in leaps and bounds. Taiwan's
total exports to China (including via Hong Kong) have more than quadrupled, from US$10bn in 1997 to US$48bn in 2004. China overtook the US in 2003 to become Taiwan's biggest market, taking a hefty 28% of the island's total exports last year. Meanwhile, Taiwan's total stock of officially-approved investments to build plants in China has jumped from US$11bn in 1997 to US$41bn in 2004 (unofficial estimates are much higher still, at over US$100bn) and these investments have begun to pay handsome dividends.
Taiwanese companies are benefiting from China's burgeoning domestic demand, but just as important, if not more so, are their successful outsourcing
operations. In particular, Taiwan's electronic companies now have well established factories in China that are processing and assembling high value-added imported components (e.g., semiconductors) from Taiwan at a fraction of the cost of doing so at home. The finished electronic products are mostly exported from China, and this explains why China's biggest bilateral trade deficit last year was in fact with Taiwan. Indeed, of China's top 100 exporting companies, the major shareholders of 19 of them are electronics companies in Taiwan, compared with only 8 each for Japan and Korea. While the pie of global demand is likely to grow at a slower pace this year, we expect Taiwan to get a larger slice of it, ensuring double-digit export growth.
This is partly because Taiwan's real trade-weighted exchange rate is still close to its most competitive level in over three decades, and 13% below
its long-run average.
But also Taiwan's low-cost export platforms in China are further enhancing the competitiveness of Taiwanese companies, not to mention their strong foothold in China's domestic market. The benefits of having low-cost export
platforms in China are probably not fully appreciated, as they do not
always show up in Taiwan's trade data.
Ample liquidity
On top of strong economic links with China, Taiwan's economy is flush with liquidity. Short-term interest rates are still close to record lows (the
re-discount rate is 1.75%), and, adjusted for inflation, the real rate was
negative in 4Q 2004. This low cost of borrowing has spurred strong demand
for loans. And Taiwan's banks, having reduced in aggregate the
non-performing loan ratio from 8.0% in 1Q 2002 to 2.8% in 4Q 2004, are
reciprocating, particularly to the household sector, with consumer loans
rising by 18% y-o-y in December. The strong loan growth has fueled a
revival in Taiwan's property market, which had languished for almost a
decade. Of course there are downside risks, including a renewed rise in oil
prices, a hard economic landing in China, and souring Taipei-Beijing
relations. But there is also a potentially powerful upside risk. If a
recovery in Taiwan's economy takes hold soon, it could trigger strong net
foreign capital inflows again, putting pressure on the NT$ to appreciate.
Perhaps a taste of things to come, net purchases by foreigners in Taiwan's
equity market totaled US$2.6bn in the first 18 days of February, already
surpassing the totals for the full months of January and December. End.