Taiwan
investors' 'China fever' cools
By Hsu Shu-chuan and Mac William Bishop
TAIPEI - It's the usual story: skittish foreign investors have tucked tail and
run from Taiwan's stock market on news that mainland China, Taiwan's main
export destination, will try to cool its dangerously overheated economic growth
by curbing investment in a few key industries - steel, aluminum, cement and
real estate. But does this spell disaster for Taiwan's economy, heavily
invested in the mainland?
Not likely, according to most international economic analysts, as well as
Taiwanese business people. The short-term outlook for regional markets may be
grim, but the Taiwanese economy should be able to weather the storm, and there
might be some unexpected benefits.
Vincent Siew, the chairman of both the Chung Hua Institution for Economic
Research and the Cross-Strait Common Market Foundation, said last week that
"credit-tightening measures to be adopted by China are expected to trigger a
short-term shock to regional economies, and may include a chill in 'China
fever'".
However, a reduction in investment in the four key industries targeted for
cooling is not likely to alter the plans of most businesses investing in China,
he said.
Most Asian stock indices saw their biggest weekly drop in years last week as a
convergence of various factors, including rising oil prices and the cooling
effect of China's recently announced policy of "economic macro-adjustment", hongguan
tiaokong, contributed to an outflow of foreign capital from regional
markets.
According to Chinese government statistics, in the second quarter of the year,
China's gross domestic product (GDP) will grow at the breakneck speed of 11
percent. In the first quarter of the year, China's GDP grew by 9.7 percent,
despite efforts to slow it. Fixed-asset investments surged 43 percent, and
consumer spending was up by 2.8 percent.
The People's Bank of China's official figures show that M2 (one of the
measurements of money supply) as a percentage of GDP last year was nearly 200
percent, according to the bank's governor, Zhou Xiaochuan. Few countries have
such a high ratio. If this ratio continues to grow, it will mean that China's
economy will become reliant on overextended banks, which will lead to dangerous
levels of inflation, Zhou said.
This is why Chinese Premier Wen Jiabao dusted off the old saying, hongguan
tiaokong, or economic macro-adjustment. China's State Council declared
on April 27 that it would limit investment in the steel, aluminum, cement and
real-estate industries.
"Fixed-asset investment is accelerating too quickly and at too large a scale
... Money supply and credit have been growing too fast. Inflationary pressure
is mounting ... We need to take effective and very forceful measures to resolve
those problems as soon as possible," Reuters news agency quoted Wen as saying
on April 28.
The phrase "effective and very forceful measures" has resonated with financial
analysts, and China's attempts to stabilize its economy have had a huge impact
on regional and international markets.
The short term looks grim
The day after Wen's comments, regional markets plunged. The Taiwan Weighted
Stock Exchange, or Taiex, was hit especially hard. It fell 284 points, or about
4.44 percent, to close at 6,117.81. Much of this drop was a result of foreign
investors shedding almost NT$27 billion (US$29.8 billion) in the day's trading
immediately following Wen's speech outlining China's intention to curb
investment in key sectors and slow its reckless rate of growth.
In the two weeks since Wen's speech, the Taiex has shed almost 920 points, or
14.36 percent of its value. On Monday it closed at 5,482.96.
The shedding of value on the Taiex will probably continue in the short term.
This is not due to the China effect alone, but also to record-high oil prices
and speculation the US Federal Reserve Board will raise interest rates next
month. In addition, a series of statements by Beijing has indicated that it may
be ready to take a hardline approach toward recovering Taiwan, which Beijing
considers an inalienable part of China but which many Taiwanese consider a
sovereign and distinct nation.
These remarks have become especially pronounced as President Chen Shui-bian
prepares to deliver his inaugural speech this Thursday. The speech will be
scrutinized and interpreted as a barometer of cross-Strait ties and a portent
of things to come. Therefore, Beijing is clearly trying to remind Chen that it
means business in opposing Taiwan's independence - and any perceived steps in
that direction - and is hoping he will take a conciliatory tone during
Thursday's speech.
China's plans: The Taiwanese view
According to Lila [sic] Tseng, an economist and manager with the
Taipei-based economic analysis firm MrTaiwan.com, one possibility is that Wen's
remarks on cooling the economy also indicated that the government wanted to
flex its muscles, knowing its actions would be felt in Taiwan and elsewhere in
Asia.
Noting that Wen's comments followed the European Union's announcement that it
would not lift its arms-sale ban against China, Tseng said the reason Wen was
the one to give the speech about China's economic plans - not usually his
purview - demonstrated Beijing's desire to show its clout. In effect, Beijing
was saying that it cannot be ignored or written off.
Still, Tseng said that hongguan tiaokong would not have a serious
long-term impact on Taiwan's economy. "The fall in the Taiex is not a regional
aberration," Tseng said. "Much of the policy is in response to pressure on the
Chinese yuan to appreciate.
"Don't take hongguan tiaokong so seriously: it's mostly media hype," he
said. "Most Taiwanese business people aren't overly concerned about the issue."
Additionally, Tseng said he believed that the Chinese government's statistics
were likely quite different from the truth. For example, he said, the true
amount of steel that China uses each year is unknown. Therefore, he said, it is
difficult to predict the true impact of China's policy.
"China's economy is too hot, but of course this hardly means that every region
of China is experiencing dizzying growth, just a few places like Shanghai,
Beijing and the littoral regions," Tseng said. "Therefore, China wants its GDP
growth to cool down as part of its effort to more evenly distribute wealth and
investment."
China implemented economic macro-adjustment on a much broader scale in the
1980s, Tseng continued. This unfortunately had a greater impact on the Chinese
economy, creating a hard landing.
"China fears this result, and as a consequence has adopted a 'surgical strike'
style adjustment," he said.
High-tech industries
According to the Chinese-language newspaper Apple Daily, the cooling down of
China's economy will have only a very small effect on Taiwanese businesses.
"The information-technology industry especially is heavily invested in China.
China's new policies should have very little impact on such businesses," the
newspaper said in a recent editorial.
The importance of China's economy as a driver of regional development cannot be
overstated. This is especially true for Taiwan. Exports to China and Hong Kong
(which serves as a trade conduit for many of Taiwan's exports to China)
comprise about 36.7 percent of Taiwan's total exports, a figure that has grown
substantially in recent years, according to Taiwan's Directorate General of
Budget, Accounting and Statistics.
But although China has vowed to slash its GDP growth rate from more than 10
percent to about 7 percent this year, the bulk of Taiwanese exports to China
should be relatively safe from any substantial decrease. This is because most
of Taiwan's exports to China will be unaffected by the cooling of the sectors
cited by Wen.
Taiwanese firms primarily sell electronics, machinery and other equipment bound
for China's industrial and high-tech sectors. High-tech firms such as Taiwan
Semiconductor Manufacturing Co, Au Optoelectronics Corp and BenQ Corp will be
only slightly affected by the adjustment, and companies with investments in
China could profit from the depressed commodity and real-estate prices of
operating in the mainland, which will lead to reduced production costs.
Additionally, the stabilizing effect of the cooling Chinese economy could be
beneficial for domestic consumption in Taiwan, and lead some Taiwanese
investors to consider increasing their investments in Taiwan.
"Unfortunately, business people are unlikely to give up on their investment
plans, and although they may delay projects, one way or another they will
pursue the strategies they have already developed," the economist Tseng noted.
Raw materials comprise a relatively small portion of Taiwan's outgoing trade,
but China is the major destination for materials such as steel and copper made
in Taiwan. Last year, almost 50 percent of China's steel and copper imports
originated in Taiwan, so the curbs on China's steel, aluminum and cement
industries will have an effect on such firms as China Steel Corp, Feng Hsin
Iron and Steel Corp, and Taiwan Cement Corp.
But bad news for one sector often means good news for another. And the
depressed prices of raw materials such as copper and steel have led to
decreased production costs, and therefore greater profitability for many
industries.
Taiwan's Ministry of Economic Affairs' Bureau of Foreign Trade said in recent
years, as demand has grown, Taiwan's steel industry primarily focuses on
domestic consumption, and exports to China are not the source or engine of
growth.
According to the Apple Daily, Formosa Plastics chairman Wang Yung-ching said at
a recent event that he thinks China's policy will not have a big effect on
Taiwan. He said he is not worried about the policy's impact on Taiwan at all.
He also thinks the recent fall of the Taiex is merely part of the normal
business cycle.
Former China Steel Corp chairman Kuo Yen-tu, who is now an adviser to Formosa
Plastics, said on May 6 that China's policy is necessary because 90 percent of
the steel factories in China are unnecessary. The global steel industry has a
very bright outlook, but share prices of Taiwanese steel companies have been
dropping continuously. "I don't know how investors are determining share
prices," he said in an article in Wealth, a monthly Chinese-language business
magazine.
He also said this most recent example of hongguan tiaokong was not as
hasty as its previous examples.
Demand for steel in China is outstripping supply. Taiwan is a major supplier of
steel and copper, accounting for 46.7 percent and 49.3 percent respectively of
China's total imports last year, though their shares of the total
mainland-bound shipments were only 7.2 percent and 2.0 percent.
China-based Taiwanese business
Decreased production costs will have an especially noticeable effect on
Taiwanese businesses based in China.
Hung Shi-ming, a public-affairs manager for Uni-President Enterprise Corp, said
his company's business in China consists of two main items: dairy products and
instant noodles. Therefore, he said, China's cool-down will have no impact on
his operations. operations. Uni-President has a major investment in
Uni-Splendor.
Last year, Uni-President had a turnover of 7 billion yuan ($846.7 million) in
China, out of $2.2 billion worldwide, so China's business comprised
approximately 50 percent of its revenues. Uni-President is not a publicly
traded company in China, so investment curbs there should not have a very big
impact on its operations.
"Even if China's economic growth slows to 7-8 percent from 10 percent, that's
still very high, so the impact isn't really serious," said Simon Hung, a
spokesman for the Taiwan company. "China's measures are more focused on the
real-estate, steel and cement industries, rather than food and drinks, which
are basic necessities," he said. Uni-Splendor Corp, a home-appliance making
venture of Uni-President's investment unit, plans to invest $50 million to
build a new plant in Guangdong province, Hung said.
Taiwanese investors in China in general welcomed Beijing's new directives,
which they said had effectively depressed commodity prices and eased their
production costs.
"Prices for copper, for instance, were immediately down 15 percent in the past
two days, which reduced burdens of our operations," said Yeh Chun-jung, who
runs a land-cable plant in the Dongguan industrial zone of Fujian province, in
China's southeast.
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