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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Daily Links:

• J Michael argues putting military cases under civilian law won't really work. Really problem is that nothing is being done to address military culture.
• Economist on Taiwan's army and death of conscript Hung
• CNA accidentally releases article killed by editor.
• UDN bitches about the legislature. 
• WSJ piece: Hung case hurting military, helping China
• Buzzfeed: 28 reasons to love Taipei. Very enjoyable pics, but I can't see how you can get from Taipei to Kenting in just four hours. Anyone ever done it?

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[Taiwan] Don't miss the comments below! And check out my blog and its sidebars for events, links to previous posts and picture posts, and scores of links to other Taiwan blogs and forums!

Ma says Taiwan FTA Need Beijing FTA First

As my loyal readers know, pundits both here in Taiwan and abroad have been saying that with ECFA Taiwan will be able to sign FTAs with other nations. ECFA must come first, they all claim, and then everything will be alright -- despite the fact that China has consistently refused to promise to permit Taiwan to have Free Trade Agreements (FTA) with other nations once the ECFA agreements are signed.

But what does Mr. Ma say about it? Taiwan Today translates the China Times:

Taiwan should not demand that mainland China allow it to enter into free trade agreement talks with other nations as a precondition for discussions on an economic cooperation framework agreement, said Chiang Pin-kung, chairman of the Straits Exchange Foundation.

The idea, first put forward by the opposition Democratic Progressive Party, is “excellent—but inappropriate,” said Chiang, adding that making such a demand publicly could cause additional difficulties.

The SEF Chairman made his remarks Jan. 11 during an interview with “Formosa Weekly,” an online newspaper founded by former Vice President Annette Lu. His interlocutor was Hsu Hsin-liang, former chairman of the DPP.

The paper adds:

In related news, President Ma Ying-jeou noted though cross-strait economic development has been growing rapidly, there has not been a systemic trade mechanism between the two sides.

“We must seek a breakthrough, or Taiwan will be marginalized in the wake of East Asian regional economic integration,” he said.

Asked whether Taiwan will sign FTAs with other countries after signing an ECFA with the mainland, President Ma answered, “It most certainly will.”

“As long as other nations have already signed FTAs with the mainland, Beijing will have no objections if these countries wish to discuss similar deals with Taiwan,” the president said.

Read it -- from Ma's lips to your ears: first Beijing signs the FTA, and then Taiwan follows, but only with those countries. In other words, Taiwan has no independent policy of its own.

Sell. out. Can it get any clearer? Is this what the foreign business community in Taiwan wants? To go meekly where Beijing points?

The China-ASEAN FTA is coming into force this year, and strangely, other nations take a jaundiced view of what an FTA with China might mean. For example:

The FTA, which was first announced at the Asean-China Summit in 2001, is the third largest in the world and covers a combined population of 1.9 billion with a gross domestic product of US$6.6 trillion and a trade volume of US$4.3 trillion.

Under the FTA, more than 9,000 products imported from China to Malaysia are duty-free while China will reduce tariffs on more than 7,000 products from Asean. Besides manufactured goods, the agreement also covers services and investment.

Unlike the Asean-India FTA, which was concluded last August at the 7th Asean Economic Ministers-India meeting, and also came into force on Jan 1, the FTA with China faces opposition.

While governments in the region have welcomed the agreement with China, whose economy is the fastest growing in the region, thousands of workers from across west Java staged a rally in Bandung against the FTA last week.

The Jakarta Post on Tuesday carried a commentary by an Indonesian academic on how the FTA could slow down the fulfilment of human rights in Indonesia, including rights to health, decent wages and access to natural resources.

Associated Chinese Chambers of Commerce and Industry of Malaysia president Tan Sri William Cheng had in an earlier interview with a Chinese-language newspaper called for a delay in the full liberalisation of trade with China.

However, sections of the business community were more cautious on the impact, with Federation of Malaysian Manufacturers (FMM) president Tan Sri Mustafa Mansur saying that it was still early to assess the impact on local businesses.

“We’re organising a special panel discussion with Chinese officials together with officials from the International Trade and Industry Ministry next month as we’ll be able to better assess the impact after one month,” he told StarBiz over the phone.

Cheng had voiced objections over the removal of tariffs for 90% of the goods traded under the FTA as local businesses might not be fully prepared. The more restricted agreement with India carries with it many exemptions, especially for agricultural products, while negotiations are still ongoing under the FTA for services and investment.

Cheng added that industries in Thailand and Indonesia had also called for a delay in the implementation of the agreement.

This opinion piece gives the propaganda vs reality on the China-ASEAN FTA. Grim....

The trend of Asean losing ground to China accelerated after the financial crisis of 1997.

In 2000, foreign direct investment in Asean shrank to 10 per cent of all foreign direct investment in developing Asia, down from 30 per cent in the mid-nineties.

The decline continued in the rest of the decade, with the United Nations World Investment Report attributing the trend partly to "increased competition from China."

Since the Japanese have been the most dynamic foreign investors in the region, much apprehension in the Asean capitals greeted a Japanese government survey that revealed that 57 per cent of Japanese manufacturing TNCs found China to be more attractive than the Asean-4 (Thailand, Malaysia, Indonesia, and the Philippines).

But wait, there's more. There's the smuggling -- not just Taiwan, it's everywhere:

Massive smuggling of goods from has disrupted practically all Asean economies.

For instance, with some 70-80 per cent of shoe shops in Vietnam selling smuggled Chinese shoes, the Vietnamese shoe industry has suffered badly.

In the case of the Philippines, a recent paper by Joseph Francia and Errol Ramos of the Free Trade Alliance claims that the local shoe industry, along with the vegetable industry, has also been hit badly by smuggling of Chinese goods.

Indeed the range of goods negatively affected is broad, including steel, paper, cement, petrochemicals, plastics, and ceramic tiles.

“Many Philippine companies, even those that are competitive globally, had to close shop or reduce production and employment, due to smuggling,” they write.

It is owing to massive smuggling that few analysts take seriously official trade figures with China released by the Chinese Embassy in Manila that show the Philippines enjoying a positive trade balance.

Then there was the Thai "early harvest" which, as the writer notes, is now well documented.

Local vegetable producers complain that they have already been badly hit by Cafta’s experimental “early harvest agreement” that went into effect in December 2005. A similar result has apparently emerged in Thailand, where the impact of the early harvest agreement with China has been better documented.

Under the agreement, Thailand and China agreed that tariffs on more than 200 items of vegetables and fruits would be immediately eliminated. Thailand would export tropical fruits to China while winter fruits from China would be eligible for the zero-tariff deal.

The expectations of mutual benefit evaporated after a few months, however, with most Thai commentaries admitting that Thailand got a bad deal.

As one assessment put it, "despite the limited scope of the Thailand-China early harvest agreement, it has had an appreciable impact in the sectors covered.

The "appreciable impact" has been to wipe out northern Thai producers of garlic and red onions and to cripple the sale of temperate fruit and vegetables from the Royal projects."

Thai newspapers pointed to officials in Southern China refusing to bring down tariffs as stipulated in the agreement while the Thai government brought down the barriers to Chinese products.

Resentment at the results of the China-Thai "early harvest" agreement among Thai fruit and vegetable growers was, in fact, one of the factors that contributed to widespread disillusionment with the broader free trade agenda of the Thaksin government; and opposition to free trade was a prominent feature of the popular mobilizations that culminated in the ouster of that regime in September 2006 by a military coup.

The whole piece, written by a member of the House of Representatives in the Philippines, is a ringing condemnation of the China-ASEAN FTA Cargo Cult, well worth reading and contemplating.

Note the same patterns we always see with China: agreements made but not kept, illegal activities designed to undermine the competition, streams of lies issuing from Beijing and its representatives, and local businesses dying off in droves. Welcome to the future, Taiwan.
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[Taiwan] Don't miss the comments below! And check out my blog and its sidebars for events, links to previous posts and picture posts, and scores of links to other Taiwan blogs and forums!