China offers credits for investment
from Taiwan By Robert M Cutler
MONTREAL - Four Chinese state banks will
offer up to US$95 billion in credit to Taiwanese
investments in business on the mainland, the
director of Beijing's Taiwan Affairs Office Wang
Yi told a conference in Xiamen, Xinhua has
reported.
The move is part of a limited
domestic economic stimulus program targeting
infrastructure projects and consumer staples and
including attempts to ensure lenders' liquidity in
order to free up capital for investment and job
creation on the mainland.
Such investment
will be all the more necessary in view of
Thursday's announcement by HSBC/Markit that the
preliminary ("flash") reading of China's
purchasing managers' index (PMI) for June has
fallen to 48.1, the eighth consecutive month of
decline, and tying the August 2008 and March 2009
slump, which was the
longest on record. (The
50 level is neutral and anything below it
signifies economic contraction).
The flash
reading is based on 85-90% of responses to the
survey of over 400 small and medium-sized
enterprises (SMEs). The government PMI, focusing
larger and state-sector companies declined to 50.4
in May from 53.3 in April after six consecutive
months of expansion. Its reading for June will be
published at the beginning of July.
SocGen
economist Yao Wei, as quoted by MarketWatch,
expects at least two more months of PMI decline
for the HSBC index. A new government directive to
banks to relax restrictions on lending to
infrastructure projects was in the news on
Wednesday. Nevertheless, the bellwether Shanghai
Stock Exchange Composite index fell to a
three-month low just above 2,250 on the PMI news.
Such centrally mandated investment will not help
SMEs to recover.
Taiwan has drawn
economically closer to the mainland since the June
2010 signature of the Economic Cooperation
Framework Agreement (ECFA). The ECFA is a
preferential trade agreement seen as the
forerunner to a free-trade agreement following
Taiwan's exclusion from the ASEAN Free Trade
Agreement with China that took effect at the
beginning of 2010 and took in the 10 members of
the Association of Southeast Asian Nations.
President Ma Ying-jeou of Taiwan's ruling
Kuomintang, whose policy of rapprochement with the
mainland led to the ECFA, won re-election in
January this year with 58% of the vote. His party
retained an absolute majority in parliament with
64 out of 113 seats (with 44.6% of the vote),
although this was down from 81 seats in the
outgoing legislature (with 53.5% of the vote).
At the time of the ECFA's signature in
2010, the leader of the opposition Democratic
Progressive Party, Tsai Ing-wen said it could lead
to "an uneven redistribution of wealth" and
"widen[ing of] the poverty gap" as the geographic
concentration of industrial production for export
would intensify.
Even a better economic
performance by Taiwanese industry would not
necessarily increase the well-being of residents
of the island, since one of the ECFA's principal
intended effects, even before the new credit
offer, was that Taiwanese companies relocate to
the mainland. However, recent economic statistics
are nowhere near the optimistic projections made
at the time of the trade deal's signature.
After resisting the downturn on the
mainland for some time, Taiwan (along with Hong
Kong) has begun to falter. Indicators suggest that
this is not just a stochastic vagary but actually
a structural slowdown. In May, the headline PMI
from HSBC for Taiwan was barely expansionary at
50.5; exports declined for the third consecutive
month, down 6.3% year on year; export orders were
also down 3%; and inflation rose to 1.7% year on
year, higher than the consensus 1.4% expectation.
Taiwan's industrial production for April
fell 2.3% after a 3.4% decline in March, and
unemployment was up from 4.1% in March to 4.2%.
One positive note is that ManpowerGroup's
employment outlook survey for Taiwan for the
July-September shows that Taiwanese employers
expect employment gains compared with the year's
second quarter in all six industry sectors
surveyed.
The tenuousness of these gains,
however, is reflected in the fact that half of
those sectors will still show job losses year on
year. The movement of Taiwanese investment capital
from the island to mainland China, in response to
the new offer of credit, will not necessarily do
much to promote industrial (and hence employment)
recovery on the island, despite an uptick in
export demand from the US, China, and Southeast
Asia.
Even Yi's announcement in Xiamen did
not do much for the Taiwan Stock Exchange
Composite (TSEC) weighted index, which closed just
under 7,280 with short-term technical indicators
turning positive after a rebound from the 6,900
level at the beginning of June and a gap-up on
Monday this week. However, the 7,300-7,400 range
is an important short-, medium-, long-, and very
long-term resistance level that bears close
watching.
The TSEC will not get much help
from the mainland equity market anytime soon. Yi
also said that measures are being implemented to
facilitate and increase tourism from the mainland
to Taiwan, but this revenue is unlikely to take up
the slack in the island's industrial production.
Surely the move is introduced, moreover, not for
the economic purpose of assisting Taiwan's
recovery but for the mainland's own political
reasons.
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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