Behind the Trade Numbers

l  Despite a rapidly appreciating currency, Taiwan's exports in January rose 16.6 percent from a year earlier to US$25.35 billion because of robust demand for electronics products from China.

l  On the other hand, imports in January also rose 21.9 percent from a year earlier to US$23.47 billion, causing the country's trade surplus for the first month of the year to shrink 24.3 percent year-on-year to just US$1.88 billion.

l  As many expected, China, including Hong Kong, was the largest buyer of Taiwan-made goods in January since retail stores on the mainland were stocking up for the Chinese New Year (CNY) holiday. Its US$10.22 in purchases was 7.l percent higher year-on-year and accounted for 40.3 percent of Taiwan's total exports.

l  With the deepening of cross-Strait economic ties following the ECFA, the proportion of Taiwanese goods exported to China will likely increase and stay above 40 percent in the foreseeable future. In the island’s highly partisan environment, however, many have perceived this development as a warning that Taiwan has become too dependent on China economically.

l  In addition, this will likely fuel domestic political debates on “putting all the eggs in one basket,” making the island's economy vulnerable to changes—particularly non-economic ones—in China’s massive domestic market.

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When Inflation Comes Knocking

l  Inflation has become a major concern for many countries around the world, and Taiwan is no exception.

l  With worldwide price increases in agricultural and raw materials, inflationary pressure has prompted the island’s leading suppliers of food products to consider price increases in the range of 5-15%, depending on the items.

l  These recent developments have forced the government to intervene and keep food prices in check.

l  With measures like lowering import duties on basic grains, the island’s leading commodity distributors, however, were still contemplating price hikes this week to compensate for rising raw material costs.

l  Government may need to take steps beyond just moral persuasion.

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China-Taiwan Ties in an Election Year

l  Taiwan will have two consecutive islandwide elections--legislative and presidential--in the next fourteen months. Neither Beijing nor Taipei, therefore, really knows how bilateral relations will evolve in the Year of the Golden Rabbit.

l  However, since both China and Taiwan had agreed earlier to place economics above all else, the focus of cross-Strait relations, at least in the first half of the year, will likely remain on: (1) post-ECFA negotiations on, among other things, mutual investment protection and dispute resolution, (2) travel by individual Chinese tourists to the island, and (3) the number of Chinese tourists--in groups of at least five--per day, excluding individual travelers, will likely be increased from 4,000 to 5,000.

l  Since Taiwan opened its doors to Chinese tourists in July 2008, they have injected a total of NT$91 billion, or roughly US$3.1 billion, into the local economy. According to the Mainland Affairs Council (MAC), approximately 1.82 million Chinese tourists have visited Taiwan between mid-2008 and the end of 2010. These Chinese nationals have, in turn, created NT$91 billion in foreign exchange benefits and commercial opportunities, particularly in retail, transportation, hotels, and tourism-related businesses.

l  Nearly 1.2 million Chinese nationals came to Taiwan as tourists last year, which was an increase of 98 percent from 2009, and another 450,000 Chinese citizens came to Taiwan for business and other reasons last year, bringing the total number of Chinese tourists to approximately 1.65 million and a year-on-year growth of 68 percent.

l  Meanwhile, the government's initiative to simplify entry procedures for Hong Kong and Macau residents, launched last September 1, has already paid dividends. During the four-month period from September 1 to December 31, 2010, 208,342 people from Hong Kong and Macau obtained a Taiwan entry permit online, which was 105.24 percent more than in the last four months of 2009. Largely because of de-escalation of cross-Strait tensions and the increasing interest on Taiwan, nearly 700,000 people from Hong Kong and Macau visited Taiwan in 2010, which was 10.5 percent more than the number in 2009.

l  Noting that Taiwan passport holders were granted visa waivers for the Schengen countries after January 11 this year, Taiwan government officials, particularly those at MAC, have openly urged Hong Kong to grant Taiwanese passport holders a similar privilege. Though there appears to be enough interest and support in the former British colony, the ultimate decision on granting visa-free privilege to Taiwanese passport holders will have to be made by Beijing in the context of overall cross-Strait relations, with or without considerations for the upcoming elections.

Government takes steps to deter land speculation in an election year

l  Taiwan's Financial Supervisory Commission (FSC) has been busy meeting with management representatives from the island’s financial holding firms in the last few weeks, with the primary focus on ways to keep insurance firms from profiteering through idle land investments and driving up real estate prices in the island’s leading metropolis.

l  After the meetings, it became likely that the FSC will use regulatory tools to force insurance companies to release undeveloped land lots and deter further speculation in the real estate sector. For the moment, Taiwan’s insurance carriers can invest in real estate under the precondition that development of land must begin within two years of the purchase of land, and the yield of the investment must be the same as the interest rate of a two-year time deposit at the post office.

l  With both the legislative and presidential elections coming up in the next 14 months, the Ma administration is paying particular attention to the leading complaints from the public, with high housing prices often at or near the top of such lists. Therefore, how to keep the real estate prices down and housing affordable to most has become a top priority for the government.

l  In fact, the FSC is considering increasing the investment yield threshold by adding one percentage point to the two-year time deposit rate to deter insurance carriers from keeping purchased land idle. Moreover, the FSC is also considering raising insurers' risk-based capital requirement, so as to force insurers to sell some of their land holdings to boost their risk capital reserves.

l  For some insurance companies, contemplated measures by the FSC have apparently worked since plans will soon begin to develop idle land lots. If, and when, that happens, it will likely result in an oversupply of buildings—both office and residential, but with a lowered building occupancy rate.

l  Though such a scenario will not necessarily be positive for the local real estate market, it may prevent further escalations of housing prices, which is good news for the incumbent administration in an election year.

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Taiwan's Consumer Confidence Rebounding

l  According to the latest poll released by the National Central University (NCU), Taiwan's consumer confidence index (CCI) reached its highest point ever in January, indicating the public remains optimistic about the island's economy in the future.

l  Based on the NCU poll, Taiwan's CCI was 86.78 in January, the highest since NCU began doing the survey in 2001. An increase was seen for all six categories under CCI, which included prices for goods, plans to invest in stocks, Taiwan's overall economic prospects, employment outlook, disposable household income, and demand for durable goods.

l  Among the many reasons for the continued increases in the CCI, the optimistic outlook can be largely attributed to the fact that the ongoing surge in the New Taiwan dollar (NTD) has lowered the cost of many products, particularly imports, and the recent calls by top government officials to increase wages for employees in both public and private sectors have also heightened confidence of individuals and families to invest and plan for the future.

l  However, there were also signs for concern, particularly among those 40 and under. There seemed to be growing concerns about their personal and family finances in the future. As a result, these consumers may become more conservative and their consumption more inhibited.

l  Since consumption, along with the island’s exports, will play a key role in driving up Taiwan's economic performance this year, the island’s overall economic growth in 2011 could depend on if individuals actually receive pay raises and their disposable income increases.

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DPP's "Dream Team" for 2012?

l  The DPP held a plenary party congress in late January, with the focus on its presidential nomination mechanism for 2012. Party delegates passed a resolution, by a lopsided vote of 227-84, to amend its nomination mechanism for the president to be “100% based on islandwide opinion polls.”

l  The same nomination procedure will also apply to the selection of the party's candidates in legislative, mayoral, and city councilor elections in the future. But the nominations of DPP legislators designated for at-large representation—which is elected based on the percentage of votes that a party gets—will be determined by a nomination committee formed by the party.

l  The new nomination rules replace the previous system of combining the results of a party primary by the rank-and-file members and an islandwide opinion poll. According to most, this amended format clearly favors Chairwoman Tsai Ing-wen and those factions closely identified with Tsai in the party.

l  Since Tsai has steered the DPP to successive election victories in the past two years, she enjoys both national recognition and factional support that are deemed critical to the DPP’s chances in 2012. Former Premier Su Tseng-chang, on the other hand, has never given up hopes on launching a presidential bid for 2012, which, given his age, will likely be his last shot at the top political office on the island.

l  Among those in the DPP that have expressed interests to compete for the presidential nomination in 2012, Tsai and Su continue to lead the rest by sizable margins. As such, many party heavyweights and factional leaders are now calling for a joint ticket of Tsai-Su, or Su-Tsai, to represent the DPP in 2012.

l  While neither Tsai nor Su gave a direct response to such a proposal, they both have urged the party members, particularly the leaders of major factions, to strengthen solidarity and unite behind the strongest possible ticket to unseat President Ma Ying-jeou in 2012. Although it’s often said that “politics makes strange bedfellows,” DPP’s “dream ticket” of Tsai and Su together, however, remains a long shot.

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US-Taiwan TIFA Talks Postponed

l  Though the “Trade and Investment Framework Agreement” (TIFA) talks between US and Taiwan were originally scheduled to take place in Taipei on January 28, the controversy surrounding the animal feed additive, ractopamine, that was recently found in imported US beef has undermined mutual trust and forced the indefinite postponement of the bilateral economic dialogue.

l  Referring to ”the atmosphere is not good for the United States and Taiwan to resume talks on further trade liberalization” as the primary reason behind the postponement decision, the TIFA talks, which was suspended in 2007 over, among other factors, US beef imports, will now have to wait.

l  Although Taiwan once considered lifting the ractopamine ban in 2007 after its own scientific research assessed that the use of the additive was safe, government regulations continued to ban the additive in livestock today primarily because of massive protests from local pig farmers. Therefore, the earlier proposal by Taiwan’s Department of Health (DOH) and the Council of Agriculture (COA) to allow ractopamine was never implemented, further fueling the controversy behind the discovery of the additive this time.

l  With or without ractopamine, the controversy surrounding US beef will likely continue to hinder progress in future US-Taiwan trade talks. As cross-Strait economic relations are moving forward quickly, there are a number of pressing issues, particularly intellectual property rights protection, that both Washington and Taipei need to address.

l  While things may slow down a bit in the next few months, there could be enough "improvements in the atmosphere” between US and Taiwan when Beijing and Taipei are set to sign mutual investment protection agreement at the next cross-Strait summit, likely scheduled for late spring or early summer.

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