In his speech marking the seventh year of his presidency, President Ma Ying-jeou (馬英九) boasted of his achievements and emphasized that, economically, Taiwan has emerged as the strongest of the four Asian Tigers. However, recently released data has been a serious slap in the face for Ma.
Export orders last month showed negative growth for the first time in 22 months, with exports to China and Hong Kong decreasing by 10.3 percent. The financial account has shown 19 consecutive quarters of net outflows, with each quarter’s outflow amounting to US$18.84 billion and cumulative net losses of US$187.8 billion. Furthermore, the Directorate-General of Budget, Accounting and Statistics (DGBAS) slashed this year’s economic growth forecast from 3.78 percent to 3.28 percent.
The sharp decline in orders from China and Hong Kong is a warning of the incoming impact of China’s supply chain.
Department of Statistics Director-General Lin Lee-jen (林麗貞) said that China is intentionally fostering the display panel and semiconductor sectors, and as the Chinese supply chain develops, cross-strait production has changed from a vertical division of labor, as in the past, to horizontal competition, with Taiwan’s display panels and electronic products being replaced by the Chinese supply chain.
Last year, Barclay’s Capital analyst Kirk Yang (楊應超) issued an industrial trend report entitled Hello China, Good bye Taiwan to point out the danger to Taiwan’s technology sector.
Since the beginning of this year, a “policy-driven bull market” has developed in China. With stock market expansion and vibrant capital markets, more funds have been injected into Chinese enterprises, improving their competitiveness. By comparison, Taiwan’s stock market has consolidated and the stocks of some electronic firms that have their manufacturing base in China have trended exceptionally weaker.
This has caused concern among Taiwanese that these firms have been affected by the challenge of the Chinese supply chain and are now fighting for survival, finally making explicit the threat of China’s supply chain to Taiwanese industry.
Taiwanese have always been opposed to economic and trade policy that leans toward China, and anticipated that industry would become dependent on China for production. In particular, the overseas production as a proportion of export orders continues to rise, reaching more than 53 percent, hampering domestic wage growth and employment opportunities.
Economic growth is the source of China’s growing national power and political consolidation. It will not want to continue being a labor provider and is likely to use any means necessary to replace foreign-owned original-equipment manufacturers’ factories with Chinese-owned ones.
Chinese corporations have greater access to cheap labor and domestic natural resources, and their means of securing positions in the market are quite extreme: through mass production they attempt to flush out market competition with cheap prices, not caring if they incur losses.
This has caused Taiwan’s four big industries — digital panels, solar energy, LED and DRAM — to pay a price. The hard lessons these industries learned has not woken up Ma’s government, which continues to push for Taiwan’s rapid integration with China.
Beijing is nurturing its semiconductor industry. Not only is it taking a two-pronged approach with policies and subsidies, it is also using antitrust investigations as a stick and massive domestic demand as bait to coerce global manufacturers, stakeholders in Chinese companies, to release patents on related technologies, leading to rapid growth of its semiconductor industry.
Taiwan’s semiconductor industry is of global strategic importance, but its cross-strait counterpart is no longer on the sidelines. As China’s new supply chain rapidly expands, Taiwan’s electronics industry must brace for impact and the government must extend its support by adopting proactive policies to prevent local firms getting caught in a battle of company versus nation.
The economy is not only facing the impact of China’s supply chain, as capital outflows are causing serious losses. Last quarter, the financial account had a net outflow of US$14.22 billion for investment in overseas securities. In contrast, net inflows of foreign capital into securities amounted to a mere US$4.6 billion.
This comparison confirms Taiwan has no shortage of capital funds. Regardless of whether the economy or the stock market is recovering, the logic behind the policy of focusing on attracting foreign investment is flawed.
The solution is to encourage the retention of domestic capital. The large quantity, extended period and persistence of capital outflows represents a loss of faith in the economy and capital market, and cannot be regarded as Taiwanese taking a global approach to their financial investments. Moreover, the New Taiwan dollar remains strong and the TAIEX dividends and bond rates are high, leaving no lack of quality investment targets.
Overseas investments, on the other hand, bear the risk of exchange-rate fluctuations and global markets face various financial bubbles, making them high-risk. Thus, net outflows of NT$5.7 trillion (US$185 billion) over 19 consecutive quarters represents a vote of no confidence in the government by investors.
When investigating economic problems, more than the overall numbers and averages need examining; the gaps between each different level in income must be isolated. GDP figures look strong, but the focus should be on whether the numbers are reflected in income levels.
If the income or wealth of Hon Hai Precision Industry Co chairman Terry Gou (郭台銘), or other corporate executives, are included in the average salary of all their employees, it would create an illusion of high-income labor, but it does not represent the truth.
As industrial policy continues to focus on integration with China, it has caused average real wages to fall to a 15 year low. Once China’s supply chain replaces Taiwanese firms, the business owners themselves are likely to become victims.
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