Bouncing back

Taiwan | April 2010

For the "old China hands" news in recent weeks from Taiwan has provided us with a refreshing blast from the past. After all the doom and gloom or recent months there was an air of familiarity about the recent newspaper headlines such as we have not seen for a long time.

True with the Republic of China due to celebrate its centennial later this year, announcement that the slogan for the occasion would be "100 Years of Excellence" seemed to be more appropriate to a venerated department store than a country that has become an Asian wűnderkinder, but then, perhaps after all that is what Taiwan is all about. Democracy, liberty and personal freedom are all very well but it is the ring of the cash registers and (these days) the swiping of the credit card that give people here the warm fuzzies. And after all, talking about democracy and freedom under Ma Ying-jeou are tantamount to treason and best left off the agenda lest someone across the water gets offended.

So for a change, it is good news month! Firstly there is news that Taiwan's economy appears to be well and truly out of the recessionary tailspin of recent times and is once more gaining altitude. All major economic indicators have rebounded, the economy is in expansionary mode and activity has returned to pre-crisis levels. Importantly, consumer confidence is also increasing despite a doggedly high unemployment rate. Unemployment is coming down but only slowly and is proving to be the laggard in the recovery process. Nevertheless unemployment has fallen to a 14-month low but is predicted to remain above five percent for the rest of the year.

Most economic think tanks have again revised their economic growth targets for this year. The Taiwan Institute of Economic Research (TIER) is now forecasting GDP expansion of 5.11 percent year-on-year for 2010, while the other government think tank, the Chung Hua Institute of Economic Research is punting on 4.99 percent. The IMF set heads turning with its announcement in the latest World Economic Outlook report that it expected Taiwan to achieve a 6.5 percentage point growth. Amongst these heady announcements, the government is being a little more circumspect; the Council for Economic Planning and Development is saying that it expected the economy to grow "by at least five percent."

When Taiwan comes out of recession it does not mess around, it is bouncing back with a vengeance.

Exports are now expected to grow by 26.83 percent over the course of the year to US$258.3 billion, according to the TIER. This exceeds the previous estimate of a 10.51 percent increase to US$225.1 billion, by a wide margin.

This optimistic forecast comes on the strength or a rapid rebound in export sales during the first quarter. In March alone exports rose US$7.8 billion, or by 50.1 percent, year-on-year to $23.4 billion; while imports were up US$9.74 billion, or 80.3 percent to $21.9 billion. These were the highest levels recorded since the onset of the global financial crisis. The trade surplus reached US$1.5 billion in March according to the official figures.

Looking at the first quarter as a whole, exports rose by US$21.28 billion, or 52.5 percent from a year ago, to US$61.8 billion. This was the second-highest figure for that period in Taiwan's history. With export activity strengthening, local manufacturers are taking the opportunity to retool and reinvest in plant and equipment. This in turn is driving imports, which were up US$25.1 billion, or 78.4 percent, year-on-year for the quarter. Now admittedly, with the economy mired in recession this time last year, these numbers are influenced by the low base effect but it does mean that Taiwan's export driven economy is back on track—and in the fast lane.

Exports to China, including Hong Kong, rose to a record US$10.26 billion in March, accounting for 43.9 percent of total exports, followed by ASEAN at 14.4 percent and Europe at 10.5 percent.

Export orders in contrast to shipments are a means of looking ahead at the position in coming months. Again the figures are pleasing. Taiwan's export orders in March grew by 43.66 percent from a year earlier to US$34.39 billion. Reportedly this was the highest total in the Taiwan's history and came on the back of strong demand from Asia-Pacific markets for Taiwan's sophisticated electronic products. For the first quarter of the year, total orders amounted to US$92.2 billion—up by almost 50 percent from the same period last year and 28 percent higher than in the final quarter of 2008.

For the first quarter, total orders amounted to US$92.17 billion, up 49.31 percent from the same period last year and 28.03 percent higher than the previous quarter.

Foreign exchange reserves reached a record high of $355 billion topped only by China, Japan and Russia and higher that Korea, Hong Kong and India.

Now these are the numbers that Taiwanese like to hear.

Despite all the good news coming out of the statistical bureau, the Ministry of Foreign Affairs was quick to sound a cautionary note claiming that Taiwan's export competitiveness had steadily declined over the past nine years in comparison with its major trade competitors, especially the other Asian tigers. Of course, this was meant to signal the need for Taiwan to sign the economic cooperation framework agreement with China (ECFA) which, so the government claims, will ensure Taiwan will not be marginalized in the wake of the creation of the ASEAN Plus One (China) free trade area.

Others disagree claiming that despite the agreement between China and ASEAN, Taiwan's economy is proving exceptionally resilient—as the latest export figures show. The fear is the hub and spoke effect whereby Taiwan's future exports to ASEAN would be funnelled through China rather than allowing Taiwan to continue to deal directly with its ASEAN neighbours.

The problem with any proposed agreement with China is that the "devil is in the detail" and the government has been rather coy about revealing any of the detail. It hopes that the framework agreement will be ready for signature within the next two months but President Ma has repeatedly ducked questions as to whether it will be put to the legislature for ratification or not. The implication is that it will not.

What is in the proposed agreement is still a matter of conjecture. Since negotiations are still underway and the issue has such sensitivity—very few people are neutral about it; most have either strong views in favour or strong views against—this is understandable. Much has been made of the so-called "early harvest" provisions which, so the government claims, will bring early benefits to Taiwan by reducing tariffs on a number of items—but so far we do not know which. President Ma has stated that the agreement will not allow Chinese agricultural items into Taiwan thereby protecting Taiwan's own farmers; nor will it allow Chinese labour into Taiwan. Probably it does not need to do so because already most Taiwanese factories are located on the Chinese mainland anyhow. If there has been any rational debate in the local press it has been over the investment conditions, and more precisely, the laws that limit China's state-owned corporations investing into Taiwanese companies. Already China is circumventing these conditions by investments through Hong Kong companies to gain greater leverage in Taiwan's commercial and financial sector.

So is the ECFA a Trojan horse, a gun to Taiwan's head or a panacea to solve all problems? You can find it described as all of these and much more. One thing is certain however, President Ma intends to push it through at whatever cost. People can do nothing other than watch and hope that it will not be a replica of the closer economic partnership agreement Chine signed with Hong Kong.