China’s economic slowdown would not have a substantial impact on Taiwan because the world’s most populous country has yet to develop into a major export market from its current status as a cheap manufacturing factory, a top Deutsche Bank economist said yesterday.
“Risks from China’s potential hard landing will not affect Taiwan or Asian economies much, given their fledgling domestic demand,” the German banking group’s chief economist in the Asia-Pacific region, Michael Spencer, told a media briefing in Taipei.
Despite its fast GDP growth in recent years, China remains a remarkably cheap place for Taiwanese firms to manufacture products destined for the US and Europe, rather than being an end market itself, Spencer said.
“China is Taiwan’s largest export destination, but not its main export market,” he said.
The observation counters popular views locally that Taiwan’s economic health hinges on China and cross-strait policy might make or break its future development.
Spencer, who worked for the IMF before joining Deutsche Bank in 2000, said tourism is the only area upon which cross-strait trade ties would have a material bearing, although the sector’s contribution to domestic GDP growth has been limited thus far.
“If China sees a hard landing, the number of Chinese tourists to Taiwan will fall,” with the effect more evident in Hong Kong because of heavier interdependence, the economist said.
Rather, the main downside risks for Taiwan lie in the sovereign debt crisis in Europe, that has slipped into a recession as a result of banks’ recapitalization efforts, Spencer said.
Deutsche Bank expects the European economy to contract 0.5 percent this year after retreating 0.3 percent last quarter, Spencer said.
He attributed the decline chiefly to the withdrawal of credit by European banks to meet tighter capital requirements, beginning this year.
The conditions will start to reverse in the second half as banks would feel more comfortable lending money, Spencer said.
“Investors are overly negative about Europe,” he said.
“It is unlikely that any nation will leave the eurozone, though it will take a long time to achieve internal balance,” he added.
The credit crunch would not inflict pain on Asia, which might feel spillover through exports, Spencer said.
Weakening external demand accounts for Deutsche Bank’s forecast that Taiwan’s GDP growth may slow to 3 percent this year, from an estimated 4.4 percent last year, its report indicated.
Inventory destocking would continue to weigh on the economy by 1.1 percent this year, from 0.3 percent last year, the report said.
The central bank is likely to keep the interest rates unchanged this year at the current 1.875 percent, unless macroeconomic situations at home and abroad deteriorate, Spencer said.