China’s suspension of communication with Taiwan is credit negative for Taiwan, because the move indicates a rise in tensions with its main trading partner and might hamper its ties with other Asian nations, Moody’s Investors Service said.
“It escalates tension with China and will thwart the ‘new southbound policy,’” the international ratings agency said, referring to efforts by the administration of President Tsai Ing-wen (蔡英文) to diversify export and investment destinations.
China’s Taiwan Affairs Office on June 25 said it had suspended communications with Taiwan, because Tsai refused to recognize the so-called “1992 consensus” — a supposed understanding between the Chinese Nationalist Party (KMT) and the Chinese government that both sides of the Taiwan Strait acknowledge that there is “one China,” with each side having its own interpretation of what that means.
The success of the new southbound policy depends largely on cross-strait relations. If engaging with Taiwan would jeopardize their trade and financial ties with China, Southeast Asian countries would give priority to China, the world’s second-largest economy, Moody’s said.
Growing political tension with China would therefore constrain new commercial relationships Taiwan hopes to forge with other partners in the region, Moody’s said, adding that could mean years of economic slowdown for Taiwan, because exports account for 65 percent of GDP growth.
About 40 percent of Taiwanese exports are destined for China and Hong Kong. China’s ongoing economic rebalancing to cut dependence on trade and boost domestic consumption has already been hurting Taiwan.
The weak outlook drove Moody’s to forecast GDP growth for Taiwan this year at 1 percent and less than 2 percent for next year.
Diversification of export destinations would help mitigate the pain of the slowdown in China and the world as a whole, Moody’s said.
Suspended cross-strait communications will not pose unbearable risks for local lenders, because China-related exposures totaled 56 percent of their equity as of March, the agency said.
Taiwanese banks have limited direct exposure to China’s corporations due to regulatory restrictions. Instead, their exposures come mainly through enterprises operating in China in which Taiwanese have invested, Moody’s said.
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