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    China Business
     Mar 31, 2012

Taiwan, Hong Kong resist
Chinese downturn - for now

By Robert M Cutler

MONTREAL - Economic performance in Taiwan and Hong Kong continues to outpace mainland China, where a slowdown is anticipated.

Last week Taiwan announced its exports grew 10.3% in February over February 2011 as the earlier Chinese New Year holiday this year allowed mainland factories to restart production earlier in the month, particularly in the electronics sector, according to the Republic of China's Finance Ministry.

Those factories on the mainland assemble components produced in Taiwan for export to third countries. The so-called "base effects", however, could not account for 17.6% year-on-year


growth in export orders in February, which followed an 8.6% decline in January.

Industrial production and the Purchasing Managers' Index (PMI) appear to confirm the rebound, although the 8.4% increase in February industrial production was lower than the 8.8% consensus revealed by a Bloomberg News survey, and in fact fell 6% when adjusted for seasonal factors.

Nevertheless, the PMI compiled by HSBC/Markit jumped to 52.7 from 48.9 in January, the first time in nine months it has registered above the neutral 50 level. But unemployment rose from 4.18% to 4.25%, the highest among its regional peers (including Hong Kong, Singapore and South Korea), while the seasonally adjusted rate fell 0.44 percentage point year-on-year to 4.15%.

In Hong Kong, unemployment in February (seasonally adjusted) also rose from 3.2% in January to 3.4%, equivalent to the rate for the whole of 2011 but well below the rate for 2010. The city's secretary for labor and welfare said that, all things considered, the rate could encounter "some upward pressure" in the months to come.

Hong Kong's exports rose 14% year-on-year, well exceeding the 5% consensus expectation, following a 9% contraction in January. Asia was the most powerful driver; within Asia, the driver was China, where roughly half of Hong Kong's exports go. Inflation fell to 5.4% year-on-year in February, from 6.7% in January.

It is best to look at economic performance over the first two months of the year together. On that basis observers caution that Taiwan and Hong Kong do not match up with the February pace, taken by itself. How anodyne one is about this fact depends on one's more general predispositions about the Chinese economy. Taiwan has already begun making formal plans on how to deal with what it expects to be a slowdown on the mainland during the coming months.

So far the stock markets, which are leading economic indicators suggesting what investors anticipate economic performance will be, are neither unconcerned nor terribly concerned. Thus it bears noting that both the Taiwan and Hong Kong stock markets have outperformed the Chinese ones.

Among the benchmark equity indexes, the Taiwan Stock Exchange Composite (TSEC) Weighted Index and Hong Kong's Hang Seng Index are both up between 13% and 14% since the beginning of the year, while the Shanghai Stock Exchange Composite (SSEC) has risen only slightly more than half of that.

The SSEC kept pace with the TSEC, which the Hang Seng outperformed, up until the beginning of the Chinese New Year; however, the SSEC reopened afterwards with declines while the other two have continued advancing, and it has never made up the difference. The first two have been in trading ranges since about mid-February, while the last has declined below its level at that time.

The SSEC, after breaking through its own long-term support at the 2,380 level to the downside, has just this week plummeted through a former short-term at the 2,320 level. Having earlier failed to break through its post-crisis second-fan to the upside, it is now testing the support at the 2,245 level, below which a very long-term support appears only at the 2,150 level.

By contrast, the TSEC has closed over a third of the early August 2011 gap-down from 8,317 to 7,976 with a short-term high of 8,144 although it has receded slightly since then; while the Hang Seng, in contrast to the SSEC, has (so far) successfully penetrated its post-crisis second-fan to the upside.

It was following the presidential and parliamentary elections in January that the Taiwan market really took off towards the upside, but the Hong Kong market has so far barely reacted to Leung Chun-ying's defeat of the business lobby's candidate, Tang Ying-yen, in the contest to become Hong Kong's chief executive.

Scandals around the latter compelled Beijing to switch its support to Leung. News stories speak of Leung's "election", but it would be more correct to describe his victory as an "appointment", decided as it was by a 1,200-person committee, itself appointed by Beijing.

As far as economic performance per se is concerned, the first two months of the year make it necessary to wait at least for full first-quarter statistics in order to determine, first, how jolting the first bump of the Chinese "landing" will be and, second, how deleterious that will be for the other two markets in "Greater China".

It is likely that the growing political uncertainty in Beijing, crystallized for the moment around disgraced Communist Party senior official Bo Xilai, has contributed to doubts over future economic performance by drawing attention to the fact that instability can come from the top as well as from the bottom of the political system on the mainland.

Dr Robert M Cutler (http://www.robertcutler.org), educated at the Massachusetts Institute of Technology and The University of Michigan, has researched and taught at universities in the United States, Canada, France, Switzerland and Russia. Now senior research fellow in the Institute of European, Russian and Eurasian Studies, Carleton University, Canada, he also consults privately in a variety of fields.

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