Last year, Taiwan’s GDP grew by 3.78 percent, leading the four Asian Tigers. The unemployment rate dropped to 3.97 percent, offering hope of an escape from economic woes.
However, average salaries still lag about 15 years behind in real terms, and uneven salary distribution continues to worsen along with the expanding wealth gap. Housing prices and costs of living are on the rise, and the majority of residents are still struggling to make ends meet as the policies of President Ma Ying-jeou’s (馬英九) administration continue to fail them.
Even worse, when looking at some of the latest data and key events, Taiwan’s real economy and capital markets seem to be facing a daunting test.
In regard to the real economy, Taiwan’s exports have taken a steep nosedive, with exports last month dropping by 8.9 percent year-on-year and first-quarter exports dropping by 4.2 percent.
Furthermore, although the government’s economic monitoring system indicated a bullish trend in January and February, the comprehensive judgement scores are stretched to the lower limit.
Yet the Taiwan Institute of Economic Research’s February manufacturing indicator ended up shifting from 11 consecutive months of “yellow-blue” to “blue” on the monitoring scale, representing an economic downturn. As Taiwan’s economy is export-driven, weakness in exports and the manufacturing sector should be a serious warning.
In capital markets, major global stock markets such as those in the US, Germany and the UK have reached new record highs, and the gains in Japan, China and Hong Kong are staggering as the strong bullish trend continues.
However, Taiwan’s stock market became stuck before reaching through the 10,000-point mark, and began to dip again in stark contrast to international trends, underlining the fragility of investor confidence. While global stock markets are celebrating their gains, Taiwan’s stock market is languishing — a situation that is worth some further investigation.
We patiently keep pointing out that the greatest underlying concern for Taiwan’s economic development is excessive reliance on China. In the past, Taiwan depended on China as a production base; however, it now wants to rely on China as a marketplace.
Previously, Taiwan’s outbound investment was all directed toward China, where China’s cheap labor enabled Taiwan to compete in the global market with low-cost products.
This type of business model had grave consequences. Manufacturers cared only about reducing costs and did not reinvest in research and development, innovation or brand development. This resulted in firms only being able to take on the role of original equipment manufacturers (OEM), the least important part of the industrial value chain.
Not only could OEMs be replaced by brand vendors at any time, they also found it very difficult to cope with the rise of Chinese businesses.
In recent years, China has used preferential land taxes and industrial support subsidies to nurture a range of sectors, including LED, solar energy, DRAM and semiconductors, the latter being the most proactively developed sector.
Recently, efforts have also been made to develop the semiconductor industry, while an all-out effort to expand flat-panel and DRAM production lines and related industries risks falling back into cutthroat competition.
Taiwanese firms also lack brand recognition. Furthermore, the Chinese market does not readily accept foreign goods. So, with the exception of a few early movers that are primarily food-based and may still have a foothold in the market, the vast majority of Taiwanese businesses find themselves being engulfed by Chinese and foreign companies and have great difficulty making a success of it in the Chinese market.
In the capital market, the serious slump in the TAIEX’s rally has derailed the stock market’s position and put it out of sync with the global markets. This is an issue that must not be ignored. The most important elements in a stock market rally are capital funds and confidence, which do not necessarily reflect the fundamentals.
The US economy appears to be making a great recovery, but the illness in its economy has only started to heal. US stocks have been able to hit new record highs only due to monetary stimulus, or quantitative easing (QE), which injects liquidity into the market, which in turn causes stock indices to increase.
The EU and Japan are also playing “monkey see, monkey do” by introducing their own QE programs, which, although their economies remain weak, has sent their stock markets soaring.
In addition, the rising China and Hong Kong stock indices, which, surprisingly, have coincided with slowdowns in GDP growth, are clearly fueled by a series of unconventional monetary policy decisions.
As for Taiwan, the lack of a QE-style stimulus program and the likelihood that Taiwan’s central bank will follow in the footsteps of the US Federal Reserve and raise interest rates, show a strong divergence in monetary policies between Taiwan and other central banks around the world.
Furthermore, the taxation system is also increasingly becoming unfavorable to investors.
There are two ways to profit from stock market investments: capital gains and dividends. The former is the result of differences in buying and selling price, while the latter is the result of corporations distributing profits to its stockholders based on its operational results.
Thus, if governments want to encourage long-term investment, they should heavily tax capital gains to curb market speculation.
However, the design of the current tax system is obviously not aimed at taxing capital gains, but rather at taxing dividends, and the incumbent system clearly encourages short-term market speculation, rather than long-term holdings.
In addition, the tax regime is discriminatory toward Taiwanese investors, while offering preferential treatment to foreign investors. No wonder the system has led to Taiwanese capital outflows, while foreign investment in the local stock market has increased by as much as 40 percent.
It is frustrating to see that the overall stock exchange dividend yield of 3.8 percent has not managed to capture the attention of investors as it should.
The China-oriented industrial policy has gutted the industrial sector, while young people are either unemployed or take low-income jobs as Taiwan’s economy essentially becomes a backwater.
China, on the other hand, with a helping hand from Taiwan, has managed to solve its employment problems, stimulate GDP growth and give foreign capital preferential status.
Yet in Taiwan, a combination of tax schemes for domestic investors has led to capital outflows, while the majority of the best blue chip companies have fallen into foreign hands.
For example, foreign holdings of Taiwan Semiconductor Manufacturing Co have reached 78 percent, which means that Taiwan’s best managers and management teams work hard to earn money for their foreign owners.
This shows that flawed policies are allowing Chinese and foreign firms to enjoy the economic results created by Taiwanese companies. The majority of Taiwanese have no share in the gains of their productivity.
It is no surprise that the average worker will never feel the effect of GDP growth, regardless of how strong.
Translated by Zane Kheir
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