Mon, Feb 27, 2012 page12

• INTERVIEW: Taiwan has to develop a double-engine economy

  Taiwan is seeking to build a services economy to diversify its risk exposure after slipping into a technical recession in the past two quarters as a result of global uncertainty. Leong Wai Ho, Singapore-based director and senior regional economist at Barclays Capital, suggests Taiwan could build a double-engine economy by deepening cross-strait trade links, whose benefits would more than offset heightened dependence on China. He set forth his views during an exclusive interview with ‘Taipei Times’ staff reporter Crystal Hsu on Friday

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  Taipei Times: Will Barclays Capital adjust its forecast of 3 percent GDP growth for Taiwan this year (projected in December) now that the presidential election is over and a new premier has been installed?

  Leong Wai Ho (梁偉豪): The estimate remains unchanged. However, I do observe positive developments in the quality of growth. My favorite indicator is the drop in the number of workers on unpaid leave.

  The supply disruption — caused by the flooding in Thailand — accounted for the drastic slowdown in exports in the fourth quarter of last year. The flooding destroyed lots of hard drive disk output, creating a global shortage.

  Taiwan was most exposed, because it had the deepest concentration in the personal-computer value chain. The utilization rate of Asustek Computer Inc (華碩), the world’s No. 5 PC brand, declined 50 percent. If you are missing a hard disk drive, you can still produce every part of a PC, but you cannot ship it. It will just sit in your warehouse. That is why PC makers cut utilization and slowed down production.

  In any case, it was critical component supply disruptions, not weakening external demand that is to blame for falling industrial production in the months of October, November and December.

  Now there is nothing to worry about, as the situation has returned to normal. In fact, the coming months may be exciting for exports, pushing utilization up to 70 percent. The headcount recovery is solid, not merely a short-term phenomenon caused by rush orders.

  TT: Nevertheless, GDP growth of 3 percent this year is slower than last year. What should the Taiwan government do to buffer the pain?

  Leong: The projected slowdown has to do with a weaker export engine amid global economic uncertainty. That means Taiwan would be losing jobs in the export sector and those jobs are mostly in China. The job losses are compensated for by the services sector, which is doing very well, thanks to increasing cross-strait trade linkages.

  We might see acceleration of cross-strait dialogue after the ruling party’s electoral victory on Jan. 14. Taiwan and China are likely to sign an investment protection agreement in the next round of trade talks later this year. That will unlock capital flows from China to Taiwan, which means greater foreign direct investment.

  Currently, Chinese investors can only buy a 10 percent stake in a Taiwanese company, which is ridiculously low. The ceiling should be raised to 50 percent and investment might take place in the LCD, semiconductor and other technology intensive sectors. Only industries deemed sensitive to national security, such as telecommunications, should remain off-limits.

  TT: Taiwan is trying to restructure its economy and put more emphasis on a domestically driven services sector. How will the effort do and could the services sector replace the manufacturing industry as a growth driver?

  Leong: The services sector accounts for about 70 percent of the economy. The idea of building a services economy does not aim to subtract the importance of exports, but to supplement it, developing a so-called double-engine economy.

  The government isn’t doing much in facilitating the transformation. The Economic Cooperation Framework Agreement [ECFA] is the primary driving force. The ECFA is not just about goods, but also about tourism. It will bring in throngs of people. Last year, Chinese made 1.8 million visits to Taiwan. That meant US$4 billion additional foreign exchange — a huge capital injection.

  When Taiwan receives a NT$1 export order, the money will go to China where the production takes place. However, Taiwan can retain all revenue dollars generated by tourism. Chinese tourists will spend money on restaurants, shops, transportation and financial services.

  That will create jobs in Taiwan and eventually the job market will grow so tight that wages will go up to meet labor demand.

  That is what I mean by quality of growth — more tourism, more services activity.

  TT: How do you account for the lukewarm response on the part of Chinese tourists to Taiwan’s free independent traveler (FIT) program so far?

  Leong: It is true that very few Chinese take advantage of the FIT program, because there are too many restrictions. Applicants have to fill in a stack of paperwork and only Chinese in Shanghai, Beijing and Xiamen are allowed to travel under the program.

  China wants to accelerate the pace of the program by opening 35 cities to FIT travel and I think Taiwan would agree. The two sides will likely announce the opening before the next cross-strait talks. We need to watch closely the upcoming Boao Forum for Asia in China, where vice president-elect Wu Den-yih (吳敦義) is set to meet Chinese Vice President Xi Jinping (習近平), who will take over the helm of the Chinese government this autumn. Wu would give his nod to broadening the FIT program, which is set to take place sooner or later, anyway.

  TT: Won’t that make Taiwan more economically dependent on China and more vulnerable to a hard landing in case of an economic slowdown there?

  Leong: The chances of China having a hard landing is unlikely, in our view. My forecast is that the number of Chinese tourists to Taiwan would climb to between 4 million and 5 million a year by 2015, following a broader FIT program. That would double the capital inflow from across the strait.

  Yes, Taiwan would become more dependent on China, but the risk of not opening up means economic isolation on the world stage.

  Any country close to China has strong cultural ties, anyway. Taiwan should take advantage of its special ties with China to lift its economic standing in the region.

  TT: The Financial Supervisory Commission has suggested Taiwan should seek to benefit from the yuan’s internationalization. What is the prospect for the government’s effort to develop an offshore yuan center in Taiwan?

  Leong: All signs are pointing in that direction and it makes senses. Taiwan has every good reason to transact in yuan, like Hong Kong does, because many Taiwanese firms are doing business in China. China is also Taiwan’s largest trade partner, accounting for 40 percent of its international trade. It can help invigorate the local banking sector.

  While China might demonstrate some flexibility over a yuan exchange, I don’t see free conversion on the horizon anytime soon. That would cost China control over the currency and its impact on the economy.
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