Taiwan’s economic competitiveness against China, and the rest of Asia-Pacific region – Has it stalled due to the slowdown in global economic conditions?

Bloomberg Online News, and as well as other business news wires reported on November 04, 2013, that Taiwan’s official third quarter Gross Domestic Product (GDP) figure came in at 1.58 percent, and is down from the consensus estimate of 2.44 percent, according to a Thomson Reuters poll of economists’ forecasts. The spread between the estimate and actual figure is approximately 86.0 basis points (bps) (1.0 bps is equivalent to one-hundredth of a percentage point), and it is quite substantial given that Taiwan is an export-driven economy, along with its global manufacturing hub, which boasts names like Taiwan Semiconductor Manufacturing (TSMC), Asus, Acer, among others. According to the latest news coming out from the news wires on November 07, 2013, the Taiwanese finance minister was reportedly telling lawmakers that for the month of September 2013, total exports fell by 7.0 percent on a year-on-year (yoy) basis, which is also one of the growing signs that the economy might not be able to reach the 2.3 percent official government estimate for the whole of 2013.

Taiwan is geographically located across Mainland China, and separated by the Straits of Taiwan. The country has a diverse population, including the natives, and the majority of 23.3 million population (current data as of July 2013 based on figures obtained from the website of the CIA World Factbook; https://www.cia.gov/library/publications/the-world-factbook/geos/tw.html) comprise of Chinese origin. Most of the population reside in the country’s capital city, Taiwan. The country has long being claimed by China after the Communists took control of China in 1949, and circumstances then have resulted in tens of thousands of Nationalists led by Generalissimo Chiang Kai-Shek, to flee from the Mainland and re-settled in Taiwan. Following the consolidation of power by the Communists in the Mainland, Taiwan has since become quite prosperous, and was regarded to be one of the four major Asian Tigers, along with Hong Kong, Singapore, and South Korea.

The recent slowdown of the Taiwanese economy has taken a toll on its electronics industry, especially when the economy is largely dependent on this sector for the majority source of its growth. One might not realise that Taiwan is said to be one of the top global producers of electronics parts, including printed circuit boards (PCBs), memory chips, silicon wafers, and other components in the Asia-Pacific region, and most of the electronic parts and components are sourced from Taiwan. The country also boasts a real-time electronic exchange platform (DRAMeXchange; http://www.dramexchange.com/) where electronic parts/components, including things like flash memory, DRAM (Dynamic Random Access Memory), and other memory chips are being priced, and sold among component manufacturers, PC retailers, wholesalers, and the so-called tech ‘geeks’ who just want to get a sense of the relative prices before they start to source for their raw materials to build their models. The country is also being endowed with various tourist getaways, including its hot springs, mountains, beaches, and nature.

The Taiwanese economy is largely dependent on its external trade growth, and cross-strait trade ties with China has blossomed under its current leader, President Ma Yin-Jeoh, but with domestic political squabbling among the ruling Kuomintang Party, and opposition parties led by the Democratic Progressive Party (DPP) over the re-establishment of cross-strait ties with China, these opposing parties have created various challenges for President Ma, who has also seen his popularity ratings slipped following the overwhelming nationwide electoral victory he obtained back in 2012. The slowdown in the third quarter GDP growth is also in tandem with China’s current slow economic conditions. Mainland China has since become one of Taiwan’s leading Asia-Pacific nations to rely on for trade, investment, and outsourcing hubs for many manufacturers. Readers might be aware that one of the top Asian contract manufacturers operating in China is from Taiwan, and later came to be known as Foxconn Technologies, a leading manufacturer which has long been one of the largest component suppliers for US-based corporations such as Apple, Inc. (AAPL) and had in the past, ran afoul with regulators over allegations of mistreatment of its workers, and illegal hiring of underage workers in China.

Controversies aside, Taiwan remains one of China’s largest trade partners, and many startups, conglomerates, and those seeking for low-cost manufacturing needs have shifted their manufacturing facilities to China due to the cost competitiveness. However, with China’s economic slowdown in recent years, along with the relative high wage costs, and other operational costs factors, most of these manufacturers have started to move back to Taiwan. It is quite a dramatic turnaround of economic changes taking place.

Despite the slowdown in manufacturing, the financial services industries from both countries have thrived; with several Taiwanese banks reportedly been able to seek approvals from the Chinese government, and have secured banking licenses to operate in the Mainland,. The offshore trading of the Chinese Yuan currency has also begun, Chinese Yuan-denominated deposits, especially those coming from the Taiwanese side have increased, and residents from both sides have increased their level of contacts through air and sea links.

The question over whether the recent stalling of growth projections will likely hurt Taiwan’s economic prospects. I believe that it is unlikely as the Taiwanese people has always been finding ways to seek for new innovations, start new companies, including the setup of many animation studios that perform some of the outsourcing work that might be normally done by the animation studios based in the United States, Japan, and other developed economies, but have since been subcontracted out to these Taiwanese animation studios to produce blockbuster animation films. Although many economists have pointed out, soon after the release of the latest third quarter GDP figures, that the latest Taiwanese government’s estimate of 2.3 percent average GDP growth for 2013 might be too far of a stretch given the global economic slowdown, I tend to think otherwise, and the country will be able to stay competitive with the rest of global economy in the next year or two. Business cycles are inevitable, but the long-term fundamentals of the Taiwanese economy are still intact across many industry sectors of the economy. Spot Taiwan Dollar (TWD) as of November 07, 2013 is showing a range of between New Taiwan Dollar (NT$) 29.362 to NT$29.408 to a US Dollar or 5.0 bps bid/ask spreads as of mid-day Asian trading hours. The Taiwan Dollar is trading in tight ranges against the greenback, and has not shown any signs of distress-like environment, as was seen during the late summer months of 2013 when massive capital outflows took place across many Asian nations as a result of impending US Federal Reserve (US Fed) monetary stimulus withdrawals. The Taiwanese economy remain vibrant, and I believe that absent any domestic tensions at home over differences among the political parties regarding relationships with Mainland China, the Taiwanese economy is able to ride out of the storms, and shall soon return to its normalised economic growth path.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc