Analysts expect Taiwan to recover in long term

Taiwan will take a short-term hit from China's efforts to rein in its blistering growth but, despite its reliance on China, will recover once its neighbor's economy cools, analysts and government officials said.

Exports of raw materials, especially steel and copper, will be the worst affected by Beijing's new directives aimed at slowing down its overheating construction sector, they said.

Chinese state media announced on Friday that no approvals for new steel, aluminum and cement projects are to be made this year in a bid to halt "haphazard" and "redundant" investments.

However, the new rules are not expected to affect electronics, machinery and other industrial items which make up the bulk of Taiwan's mainland-bound shipments.

"Slumps of share prices last week reflected Taiwan's heavy economic reliance on China. The local market was overreacting, but it shows people's fear that a slowing mainland economy will also drag down Taiwan's economic development," said Yu Teh-pei (余德培), an economics professor at the private Soochow University.

Panic-selling caused the weighted price index to drop 6.9 percent in the past two trading sessions after the announcement of the new measures, aimed at curbing China's 9.7 percent first-quarter growth.

China's State Council also ordered the process of converting farmland for use in infrastructure projects to end "to curb the investment craze," and banks were asked to reduce loans to the auto, steel, property, cement and aluminum industries.

But officials here said the adverse effects on Taiwan's economy would be only temporary.

"The moves taken by China are sure to cause a negative impact ... but they will be short-lived and will lead to healthy economic development in the long run," said Ho Mei-yueh (何美玥), vice chairman of Taiwan's Council for Economic Planning and Development (CEPD), which sets the nation's economic guidelines.

"Stable economic growth on the mainland will benefit Taiwan as well as the rest of the world," she said.

To offset anticipated export decline, Yu said authorities in Taiwan should take immediate measures to boost domestic consumption.

"For instance, various planned major infrastructure projects can be launched now that shortage of steel has eased and prices of construction raw materials are dropping," she said.

Despite political differences, China has been Taiwan's leading market since late 2002, taking a quarter of the its exports.

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 is also the favorite destination of Taiwanese investors, luring an estimated US$70 billion over the years.

Taiwanese investors in China 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 south east.

He said copper costs had doubled in recent months, forcing many cable-makers to halt production.

The world's largest contract chipmaker, Taiwan Semiconductor Manufacturing Co (TSMC), said the recent China fears would not affect its long-term investment plans on the mainland.

"They are short-term measures, and in our long-term plan, China is still the leading partner," said TSMC chairman Morris Chang (張忠謀).

TSMC is in the final stage of building a US$900 million plant in Shanghai to produce eight-inch wafers.