Wednesday, November 11, 2009

Economic Views

Global financial mavens are betting that Taiwan's currency is going to appreciate (go up in value), as Taiwan approaches the signing of the historic financial MOU with China, which probably won't have any benefits for the island as a whole, but which local financial firms appear to assume will make them big players in the emerging cross-strait financial market. In response, the government has moved to limit funds from foreigners invested in currency speculation.
Taiwan will bar foreign investors from putting money in time deposits with immediate effect, the island's financial regulator said on Tuesday, as the authority moves to curb what it sees as currency speculation.

The Financial Supervisory Commission announced the move at a news conference after the island's central bank said in October that foreign investors have parked about T$500 billion ($15.5 billion) in Taiwan dollar accounts.

Foreign funds have been actively entering Taiwan's forex market in recent months, on expectations that the currency will strengthen further.
To put it simply, each time someone puts money into Taiwan's banks as NT dollars, they must buy Taiwan dollars. This new demand puts pressure on the NT to rise in value, just as any other good might when demand for it rises. Not only does a rising NT threaten Taiwan's export industries at a delicate time -- it makes everything they sell more expensive -- but it also threatens a speculative bubble that could do grave harm to the economy when it pops.

Against this background Heritage Foundation today hosts a piece on Taiwan's economic relationship with China, with several excellent observations.
It may be difficult to imagine how the centerpiece of Taiwan's economic strategy could be anything other than more open trade and investment with the PRC. The PRC will shortly be the second largest economy in the world and, barring catastrophic events, will be one of the four largest economies indefinitely, perhaps even becoming the largest within a generation.[3] Such a market is obviously a powerful attraction to an island of 22 million people less than 150 miles off the Chinese coast. However, the most lucrative years for Taiwan-China business and trade have already passed.

As an investment, China is moving from a "growth" stock to a "value" stock. In terms of raw growth, the days of 14 percent GDP gains in the '90s and 12 percent GDP gains earlier this decade are gone, to be replaced (after the post-crisis bounce) by long-term growth of about 8 percent annually. And that is if all goes well.[4]

Specifically, the PRC's successful globalization means there are fewer opportunities left for Taiwanese companies. In the 1980s, the mainland desperately needed intermediaries to connect more fully to the outside world. That is no longer the case.

In the 1990s, China became one of the centers for global production. This process involved several hundred billion dollars of investment from elsewhere in East Asia for the purpose of relocating production to the PRC.[5] Preferential access for Taiwan at that time would have been economic and commercial gold. Now, China's cost advantages are at risk, and production will inevitably begin to move elsewhere. Both the mainland as a source of dynamism for the Taiwanese economy and Taiwan playing a pivotal role in mainland development in return are therefore waning--not waxing--forces.

Beyond China, a central Taiwanese motivation in negotiating ECFA is to secure access to trade pacts involving the Association of Southeast Asian Nations (ASEAN), with which the island has considerable economic ties.[6] But there is no guarantee, even with an ECFA, that China will tolerate ASEAN extending such pacts to Taiwan. Further, the Taiwanese economic relationship with ASEAN shares the critical feature of the cross-straits relationship: a current lack of dynamism.

Other options should therefore be cultivated. In particular, Taiwan should seek partners poised for a period of especially rapid growth, better positioned to achieve rapid gains from fresh globalization, and in greater need of Taiwanese technology and service industries.

An obvious candidate is India. India is now entering a demographic expansion of similar magnitude and importance to the one the PRC is leaving.[7] Technology is an Indian strength but India's service sector offers many opportunities for mutual gain from Taiwanese investment. And, just as with the PRC earlier in the reform process, the potential size of the Indian economy makes opportunities for Taiwan effectively limitless. In some ways, India is China 15 years ago, with a decade of 12-13 percent growth potentially available, to be then possibly followed by the same 8 percent annual expansion China now seeks.
The piece ends with policy recommendations. Just what is China's economic growth is a matter of some controversy, as a piece on Politico today rounded up the voices of critics who think China's growth is in large part illusory. But Scissors' major point, that Taiwan needs to diversify away from China, is one that the DPP attempted to put into operation during its eight years at the helm of the government.

A move toward India has another obvious advantage, and that is India's position as a geostrategic counterweight to China. But our current administration, which has conceded our diplomatic space to the Chinese, isn't likely to move in that direction either diplomatically or economically.
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16 comments:

Red A said...

Why didn't you post this last week when I was going to the bank to exchange some cash?

Now I have to pray this does not actually happen so I won't feel like a chump.

:)

Thomas said...

I was giving this some thought this evening while running at the gym. On the 7:30 news, a big story was about China's most recent economic figures and how stimulus is doing wonders.

This was a topic that was already fresh in my mind having read the story about the growth skeptics earlier today as well as the economic report that the article cites.

An earlier programme had just pointed out that much of the current boom in GDP is built on phantom growth -- spend money to build useless or unneeded things and you will still get GDP growth.

Then I thought back to a small blurb about that windbag Jim Rogers that I read in the SCMP a day or two ago.

I can only think that China's growth is almost entirely a story of optimism and expert consulting at the moment. Who maintains the fable that China's current growth is meaningful abroad? Western pundits and businessmen with interests in China as well as the politicians that have been swayed by them. Who maintains the optimism in China? Currently, a population that wants to believe that the current growth will continue forever before they snap up empty apartments to store money.

Now I read your comments about India. My thoughts have suddenly switched to, "What happens when the next big thing emerges?" Will India benefit from the same optimism as China or is China something "unique"?

After all, what is it that maintains any semblence of Chinese soft power now? Could it be books like "When China Rules the World"? Being the new toy in the toybox has its advantages. What happens when the toxic paint on the toy begins to rust?

geadde said...

India? Wait, 10 years ago India supposed to be China's equal. Now India is the next China. I just love conservative think tank economic analysis. I guess last 8 years of their economic believes/philosophy haven't hurt US bad enough, now they want to hurt other countries. However, as long as people like "Joe the plumber" believe he actually made 250k a year, it is all fine by me. I will just take advantage of it.

As for who is next China, I will bet on Vietnam more than India, heck, I will bet on Thailand or Malaysia even more. India? You should see Jim Roger's face when an interviewer asked about India's future. India is a classical example of how a badly developed "democracy" can go so wrong against its own people.

When a company announce it is going to invest in India, short the heck out the company!!! Just look at what had happened to all the high-tech companies' stock decided to transfer significant amount of their services to India...it usually took a 10 to 20% hit in a year or two. Ever heard of Microsoft and Dell's horror stories in India (big pharma's, at&t's, CA's, Coca Cola, and Pepsi's etc).

Anonymous said...

Heritage Foundation. 'Nuff said. The less attention paid to that GOP mouthpiece the better.

I've heard it mentioned that the pro-green side is becoming more and more GOP-like recently. It appears it's true.

Anonymous said...

I still can't believe that the American Institute in Taiwan AIT is now in the hands of Tyson, Cargill and other American beef lobbyists. So they get caught exporting beef with spine against the rules to Japan and now they want to dump it on Taiwan?

Where can I buy some of that Penghu beef?

Arty said...

Wait why my post name is geadde. Damn word verification.

Michael Turton said...

Heritage Foundation. 'Nuff said. The less attention paid to that GOP mouthpiece the better.

I've heard it mentioned that the pro-green side is becoming more and more GOP-like recently. It appears it's true.


I'd like to put stuff up from the Dem side too...

...except that Dem and progressive thinkers don't give a flying fuck in a rolling donut about Taiwan or its democracy. Progressives have totally abandoned the island.

In the meantime, the people who are writing on Taiwan happen to support the Republicans. You get me the choices, I'll take'em.

Michael

Thomas said...

"You should see Jim Roger's face when an interviewer asked about India's future.

Jim Rogers is hardly an unbiased source to use, and I would note that people would have had just as much skepticism about China 20 years ago.

India has a lot of problems, but it has a market of comparable size as that of China and a relatively well-developed tech industry. It is also a self-admitted strategic competitor of China. So I am curious. Why do you write India's future off so readily? I don't think the report in question makes the case that India is where it needs to be now. The point is that it is a potential source for future investment.

Red A said...

Thomas,

I suspect China could be coming up for a bust due to massive credit creation, etc., but that can be looked at as movement around the trend, so to speak. But its pretty opaque when you have GDP up and electricity consumption down.

geadde,

India is China's equal/the next China. These are short-hand analogies that aren't supposed to be taken literally or have deadlines. They are very different economies, but the overall idea is that large populations are now partaking in the global economy.

Vietnam,Malaysia,etc. are also parts of this story, really, but smaller only due to population size.

I also find it amusing that Michael has to use Heritage foundation studies. Next thing you'll know he will be using Cato Institute links.

wv = paricato

Richard said...

At first glance, like the idea about using US weapon sales as leverage for the missiles pointed at Taiwan. But, in doing so, it would throw a lot of things up in the air at the same time.

Most notably is that the US is supposed to not consult with China about arms sales to Taiwan, so in doing the above, it would seem like they are doing exactly that. Although, it seems like the US has been "consulting" with China about these arms sales all these years anyways.

Red A said...

Hey, maybe the KMT government could talk their buddies in China into allowing the RMB to appreciate more, thus allowing everyone else to do the same instead of desperately trying to keep their currencies "competitive" for exports.

http://www.ft.com/cms/s/0/176e0db6-cee9-11de-8a4b-00144feabdc0.html

Was thinking of selling off my RMB - now I will wait and see.

p.s. Not allowing investments in Time Deposits. Hmmmmm, maybe this is a way to force the barbarian investors to buy TAIEX stocks instead? Because time deposits seems less "hot" than a sight deposit or stock investment.

Anonymous said...

Jim Rogers? The guy who can't stop talking about how rich he is but every time he's asked about his net worth refuses to say anything about it? If he has so much money, why is he caught trumpeting how much his townhouse in NYC was worth everywhere prior to moving to Singapore, and why is that very non-notable fact so conveniently inserted into his Wikipedia article? (Most publications say $15 million but he or someone who works for him upped it to $16 million in the article so you KNOW there's something up with that statement).

This guy lost his shirt at some point; he saw Soros' enormous success after he left and has been chasing him ever since.

How can a guy supposedly with so much money be working so hard to make chump change from book sales? That's a very interesting fact--if he has any money, it's < 10,000,000 US, but I wouldn't be surprised if he had much less than that left.

It's not hard to see why someone like Arty would fall for someone like Jim Rogers ;-)

Dixteel said...

Hey, that is actually a very good point. It is actually a big negative impact of "moving closer to China." As you move closer, NT appreciate more and more, and that just sucks for export. Since Taiwan is supposely exporting economy, that is going to hurt big time.

China on the other hands fixed their currency value, they won't get effected, at least in the short run.

Red A said...

OK, Here is my prediction.

If the deal with Taiwan gets signed, China will allow its currency to appreciate somewhat.

This helps China in two ways:

1. Makes any NTD appreciation less painful.
2. Pleases USA and Europe.

Bonus: may offer an excuse to people in China - "we had to help Taiwan out", rather than look like they are giving in to foreigners.

Michael Turton said...

Red A, thats a very interesting prediction. You could add:

3. Makes purchases of Taiwan stuff cheaper....

Arty said...

It's not hard to see why someone like Arty would fall for someone like Jim Rogers ;-)

Fist, I don't even know Jim Roger has a book out. Also, why Warren Buffet has a book out? He clearly has more money than anyone else. Roger shorted Citi bank at 30 dollars (so I think he made a killing and is doing fine). I don't really listen to Jim Roger or anyone else, I simply states his reaction when he was asked about India (because I was giggling and have the same thought).

As for India, talk to me if India can get 24 (or just 8 hours, lol, a lot of high tech instruments took hours if not an entire day to turn on once you turned it off) hour uninterrupted power supply in major cities or industrial areas (don't tell me that all you need is a generator on site), or a highway that is not build in 100 pieces (don't get it; time to google). I expect as much from expats of this site to take the simplest thing for granted (and didn't realize that it is the most important thing for a successful foreign investment) based on you guys' attitude here. Is it so hard to think of a nickname Anon?