Taiwan's current economic fundamentals are considered fair. The economic growth rate for this year is forecast at 6.7 percent, while the export growth rate for the first half of the year has reached 23 percent already -- both numbers are much higher than the 5.4 percent economic growth rate and the 9 percent negative export growth rate during the Asian financial crisis in 1998.
As for bank liquidity, in June, M1B (
Still, Taiwan is facing potential economic problems due to the imbalance of the triangular industrial structure among three major industries.
First, the high-tech industry: Because of the great need for capital flow in the high-tech sector, this industry is continuing to grow rapidly. If we examine foreign markets, although the US economic growth may slow down in the second half of the year, the market in Europe is still going strong. Hence, further development of Taiwan's electronic and high-tech industries over the next twelve months is expected, and companies in Taiwan should have no difficulty in raising funds to expand their businesses.
Second, general and traditional industries: Wage and land costs for Taiwan's companies are generally higher compared to its neighboring countries. Plus, many of the traditional industries are now heavily focused on external investment and have relocated to foreign countries, which has cut capital expenditure on land considerably. As a result, the development of traditional industries, especially the construction industry, has been seriously affected.
Third, banking industry: Due to the uncertainty of the new government's economic policies, the TAIEX (台灣證券交易所加權股價指數) has slid making it harder for companies to raise funds from the stock market. Meanwhile, in June, the growth rate of bank advances and investment, a key channel for companies to raise funds, was 2.74 percent. The percentage is way below the economic or money supply growth rate, which indicates that bank advances in Taiwan are not optimistic. Although the growth rate of bank advances and investment was already low before May, the TAIEX was rising as high as 9,100 point due to two major supports -- the stock market and bank financing. Nevertheless, both supporting sources seem to be problematic now and might lead to another financial crisis if the weaknesses cannot be rectified.
To correct the imbalance among the three major industries indicated above, the competitive high-tech industry should continue its role as the driving force behind Taiwan's economy. As for the traditional and banking industries, the new government needs to come up with an effective policy in order to assist them. Here are my suggestions:
1. Since the stock market is extremely volatile -- responding to rumors or whispers, the new government should draw up clear policies to rebuild investors' confidence in the stock market. For example, Alan Greenspan, chairman of the Federal Reserve Bank (
2. The new government should promote Treasury Stocks (
Therefore, for companies with lower share prices, I suggest that these companies promote treasury stocks in order to control their share flow in the market and to prevent prices from dropping. Moreover, because of the stock market's rapid growth and the tax-free policy for secondary public offerings, investors usually prefer stock dividends. However, companies with dividends higher than bank bid rates should try to deal out cash dividends to stabilize their share prices. They can also attract more depositors to put their money into the stock market by promoting investment advising services.
3. The new government should assist the construction industry in solving its problem as well helping homebuyers when purchasing houses. The idea of the government's NT$300 billion subsidized housing loans scheme is not bad.
Nevertheless, without a well-organized plan to finance the subsidies, it may have more disadvantages than advantages. Take Japan, after the bubble economy (泡沫經濟) in the '90s, for example. The Japanese government encouraged banks to provide massive housing loans in order to stimulate business, which later led to a long term economic crisis in the financial and banking industries and finally forced the government to supply trillions of yen to the banks to deal with their financial difficulties. It has been reported that the new government is going to offer a 90 percent preferential housing loan to homebuyers, and 20 percent of the subsidy will be insured by the small and medium enterprise credit guarantee fund (
This policy is similar to Japan's and needs to be managed carefully since it is destined to create many garage accounts and may cause problems in the construction industry. Since borrowers only need to pay a 10 percent down-payment, banks have a greater risk exposure. And, in the event of an economic downturn, which would lead to a higher percentage of defaults, banks would stand to lose a great deal. To improve we simply follow the former Cabinet's NT$150 billion subsidized housing loans project and ask homebuyers to raise 70 percent of the total payment by themselves, the construction industry's burden and the homebuyers need for a large housing loan would be reduced.
4. The new government should promote major projects such as housing loan securitization (
Such major projects will effectively prosper central and southern Taiwan, and will iron out the housing disparity that exists between Kaohsiung and Taichung, and the shortage in 921 earthquake disaster areas.
Before a policy is advocated, government officials should consider its long-term effects, not just its short advantages. Once it is announced, it should be put into practice accurately. In this way, we will be able to continue developing and advancing the economy effectively.
Paul Chiu is the former Minister of Finance.
Translated by Eddy Chang
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