Tuesday, August 13, 2013

Economic Round Up: Beijing to strip Taiwan banks?

So hot on the east coast this weekend, everyone is taking a dip.

With President Ma away on a foreign trip, FocusTaiwan provides some of the most recent numbers on Taiwan's economic situation....
Taiwan's exports usually post strong growth in July, but that was not the case this year. A rare monthly decline in exports was recorded in July and the annual export growth rate for the month was also lower than expected.

Even though exports rose 1.6 percent year-on-year, the growth rate fell far short of expectations, said Liang Kuo-yuan, director of Polaris Research Institute.


Taiwan recorded a rare 0.9 percent annual decline in exports to China and Hong Kong in July, according to customs statistics.

Another factor that affected exports in July was the 7.7 percent drop in the export of information and communication technology (ITC) products, Liang said.
According to the articles FocusTaiwan collected, Taiwan's July exports fell 4.4 percent from June but increased 1.6 percent year-on-year. In June exports had annualized growth of over 8%. A huge chunk of growth was due to mineral exports, which grew 20%, with the steepest decline in capital goods. Another signal of bad times to come: imports from the US and Japan both shrank over 15%. Since those two countries are Taiwan's most important sources of production technology and raw materials, shrinking imports should mean that producers are planning to produce less.

The Taipei Times published an excellent editorial on the economy the other day. It noted:
Taiwan’s economy lost steam again last month after exports shrank 4.4 percent month-on-month to US$35.3 billion, data released on Wednesday by the Ministry of Finance showed. That brought the nation’s exports up just 2.3 percent during the first seven months to US$175.74 billion from a year ago.


Taiwan’s exports to six emerging countries, including Malaysia and five other ASEAN members, showed robust growth as reflected by an annual growth of 7.3 percent in exports to US$33.45 billion in the seven-month period ending on July 31.

That makes ASEAN countries Taiwan’s second-biggest export destination, surpassing the US, Europe and Japan.

In fact, ASEAN seized the No. 2 position in 2007, when exports to those countries grew at an annual rate of 16.7 percent, outpacing China’s 12.6 percent expansion based on the statistics compiled by the Ministry of Finance.
Facts like these show the retrograde nature of Ma's go-China policy in its full light: it actually refocused Taiwan away from cultivating growing markets abroad to a stronger focus on the China market. You could hardly ask for a better strategy for Taiwan if you were an economic planner in Beijing looking at a Taiwan that was competing with your exports to the ASEAN area. I'm sure it is just a coincidence.

The services pact with China was totally ripped by Huang Tien-lin, President of First Commercial Bank, in the Taipei Times....
Why do I say this is the beginning of a disaster? You need only look at how enthusiastically the financial services industry has flocked to China. Confucius said: “Going too far is as bad as not going far enough” (過猶不及). This is a sentiment deemed fundamental to economists and yet, even now, there are many financial holding companies preparing to increase their investments in China and plough billions into local banks, mergers and acquisitions, and stocks and securities, and opening overseas branches in Fujian Province.

Initial estimates suggest that Taiwanese banks have either already transferred, or are preparing to transfer, not less than NT$160 billion in core capital to China. This is another example of integration with China that will surely see the further marginalization of Taiwan, just as the exodus of Taiwanese manufacturing to China did in the past.

Closely related to this is the deregulation of Chinese yuan deposits in February that, in the short four-month period to the end of June, has seen the accumulation of more than NT$360 billion worth of Chinese yuan in domestic and offshore accounts. This figure is increasing at the rate of NT$50 billion per month, giving a projected annual increase of NT$600 billion, a rate and amount equivalent to half Taiwan’s average annual increase in national M2 deposits — NT$1.2 trillion — in the decade from 2001 to 2011.

What is the purpose of accumulating all these yuan deposits? Naturally, they are to be used for providing financial services in China. This increase in credit financing in China means squeezing the amount of credit available to be extended in Taiwan.
Credit is a key driver of economic growth, the lubricant of a healthy economy. As Huang notes, the money flows not only will reduce investment on this side of the Strait, but also threaten Taiwan politically and socially by increasing the exposure of local banks to China's increasingly slowing economy. This "financial integration" has long been an important goal of China precisely because its political effects are so powerful. Unlike the US, Taiwan cannot simply print an enormous pile of money and save its banks. Debts owed to Taiwan banks give China additional leverage over Taiwan -- both directly: "Submit! Or we won't pay up!" -- and indirectly, since bank officials are likely to pressure the government to further align itself with Beijing in order to protect themselves from the consequences of the coming overexposure. Not that they aren't already.

Consider also: Taiwan's truly wealthy keep their wealth parked overseas or in land; savings in local banks are likely to be held by middle class and upper middle class individuals. It is they who will suffer if and when Taiwan's overexposed banks are punished by huge losses in China.

The move to China by the banks comes at a time when private domestic investment is moribund. The Economic Daily News observed:
According to the Directorate General of Budget, Accounting and Statistics, the increase in consumption was driven by rises in stock transactions and mutual fund fees. This demonstrates that the consumption increase had nothing to do with real consumption.

The rise in net exports, meanwhile, was the result of slower growth in imports, due to slower demand for equipment. Consequently, capital formation contracted 3.03 percent in the second quarter, cutting 0.52 percentage points off overall economic growth.

More worrying still, over the past five years, there have been four years in which private-sector investment recorded negative growth, despite various efforts made by the government to promote investment.
Recall also that Taiwan is not attracting much foreign direct investment; FDI was negative in 2011, positive for 2012 (source). With economic expansion slowing in Japan, and the US and Europe afflicted with austerity madness, it seems Taiwan will continue to suffer from the stupid, self-destructive policies of European and American elites.

Finally, enjoy a well written blog post on the nature of the debates over China, its credit issues, and its growth model from Michael Pettis.
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Okami said...

Taipei to Kending in 4 hours is doable if it's the middle of the night, you take Highway 3, and can manage 119kph the whole trip till you get to where Highway 3 ends in Pingdong County. I've had a bus ride of less than 3 hours from Taipei to Kaoshiung.

Anonymous said...

HSR to Zuoying, 1.5 hours. There's a shuttle bus from there to Kending, 2.5 hours if the traffic's OK.

Michael Turton said...

I suppose, if you are super lucky with transit times, it could be done.

J in Taipei said...

Just stumbled across your site... Great insights into Taiwan's economic landscape.

It is definitely difficult to find people in Taiwan, local or foreign, who grasps the economic situation as well as you.