China’s stimulus measures kick in

l  Conflicting economic news have come out of China in recent weeks. Although China's inflation eased to 3 percent in May, other statistics, including industrial output, indicated a slowdown in the world's second largest economy appears imminent.

l  On the eve of Communist Party of China’s (CPC) 18^th Congress and its once-in-a-decade power transition, these weak numbers cannot be good news for China’s outgoing leadership of Hu Jintao and Wen Jiabao.

l  The combination of falling inflation and sluggish industrial production will give Beijing more room to loosen monetary policy and implement stimulus measures.

l  We thus expect the People's Bank of China (PBC) to cut both the required reserve ratio and interest rates further in the second half of the year. PBC’s recent decision to lower China’s interest rate by 0.25% was, in fact, just the beginning.

l  More significantly these disappointing numbers have led to a deliberate change in China’s macroeconomic policy where more emphasis is now placed on growth and expansion.

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Is Pingtan Island project a showcase for “one country, two systems?”

l  The campaign to attract Taiwanese capital and talent to the experimental development project in Pingtan Island, off China's southeastern province of Fujian, continued to be a hot and controversial issue in cross-Strait relations.

l  A raft of 16 regulations was promulgated by Fujian Provincial Government in early June to encourage bilateral exchanges. Though these provisions may seem minor, the intent--as perceived by the government in Taipei--was to make business and living conditions on Pingtan Island as close as possible to those in Taiwan.

l  The official response from Taipei, however,  has been largely negative, claiming the Pingtan Island project was designed to be a showcase for the “one country, two systems” formula.

l  We do not expect Taipei to change its long-held opposition to the Pingtan Island project simply because of the underlying "political overtones" surrounding the planned development.

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Taiwan’s competitiveness ranking dips a notch

l  According to the World Competitiveness Yearbook 2012, Taiwan was ranked 7th in the global competitiveness survey, falling just one notch from 2011 primarily because the island’s disappointing economic performance since mid-2011.

l  Amidst the deteriorating sovereign debt crisis in Europe and the sluggish recovery in the US, Taiwan’s exports, employment outlook, and foreign investment will not have a sharp and sustained rebound until possibly the 3^rd quarter, at the earliest.

l  In addition, Taiwan will, if not already, face challenges ranging from cultivating and retaining talent, strengthening innovative R&D, enhancing corporate governance, promoting further normalization of cross-Strait economic and trade relations, and continuing financial and fiscal reforms—none of which is easy in a divided and confrontational domestic environment.

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DPP elects a new chairman

l  As expected, former Premier Su Tseng-chang was elected the new chairman of the Democratic Progressive Party (DPP) on May 27. Though Su was able to capture 55,894 votes, or 50.47%, it was not an easy victory for the former premier.

l  Amidst all the changes taking place in Taiwan’s domestic political environment, there are three major challenges confronting the DPP under Su: (1) party unity; (2) policy reorientation, particularly on cross-Strait relations; and (3) inter-party relations. In addition, Su needs to begin preparations for the “seven-in-one” elections scheduled for late 2014.

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Interpreting President Ma Ying-jeou’s inauguration speech

l  As predicted in ETRC market report weeks ago, Taiwan President Ma Ying-jeou’s inauguration speech on May 20 did not contain any major surprises.

l  Besides reiterating his long-held commitment to the “1992 consensus” and the “no unification, no independence, and no use of force” position, Ma did elaborate further on the concept of “one country, two areas” by declaring that the “one country” refers to the Republic of China (ROC).

l  It was not something Beijing wanted to hear, but it was necessary to silence domestic critics upset over the implied “one China” connotation in the original formula.

l  Overall, Beijing was mildly disappointed with Ma’s speech. The original expectation was to hear Ma stating something like “Mainland and Taiwan belong to a single China,” which, if said, could signal to Beijing that the two sides could be inching closer to cross-Strait political dialogue.

l  However, since the ROC constitution has a “one-China” framework, Beijing cannot be too unhappy with the speech.

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Taiwan’s exports remained listless

l  Amidst continued global economic uncertainty, Taiwan’s exports took another beating in April as the value of export orders received fell from a year earlier.

l  Export orders totaled just US$36.09 billion in April, down 3.52 percent year-on-year and 5.95 percent from March. Among the reasons, a high base period in April 2011 and seasonal adjustments for information and communications products were considered primary.

l  Though China remained Taiwan's largest source of export orders, the total amount fell 7.8 percent in April from a year earlier to US$9.26 billion. It was the fifth consecutive month that export orders from China have posted a decline.

l  Overall, the outlook for May is not encouraging since some of Taiwan’s export markets—from China, Japan, the European Union (EU) to the United States—have been struggling economically.

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