Two strong financial typhoons are headed Taiwan’s way: the Greek debt crisis and China’s stock market crisis. The Greek drama has played out over the past several years and many potential outcomes can be predicted. It is possible to take the best damage control measures and the situation can not be treated as a “black swan” event. In contrast, China’s stock market started to soar in the second half of last year, with extensive stimulus from Beijing possibly creating the largest financial bubble in history. In recent months, the market plummeted by 30 percent and is in danger of collapsing, bursting the bubble and creating global shockwaves. China is the black swan that Taiwan needs to watch carefully.
A black swan effect refers to a sudden, unpredictable event in financial markets that has a significant impact. The 2010 European debt crisis, which shook five European economies — Portugal, Ireland, Italy, Greece and Spain (PIIGS) — was a black swan for the global economy and financial markets. However, after five years of dealing with the situation, most PIIGS’ economies and financial systems have stabilized and are now out of danger, with the exception of Greece. After long-term treatment, Greece still shows no sign of recovery.
Greece’s debt situation has worsened and people have prepared for a worst-case scenario. Regardless of how the Greek situation plays out, it cannot be considered a black swan event and the repercussions will be limited for Taiwan. However, the nation must take a more vigilant approach toward the Chinese crisis and consider how to build financial defenses.
The crux of the matter is that the nation’s economy and trade has for a long time been directed toward China and this has led to a structural imbalance: As China’s stock market rose, Taiwan’s market showed no growth, but if the Chinese stock market collapses, the Taiwanese market will tumble with it. Likewise, when China’s economic growth looks bright, Taiwan does not necessarily see any benefit, but when the Chinese economy begins to slow, Taiwanese exports suffer a major hit, leading to an economic decline.
Taiwan’s integration with China is not necessarily all negative, but the benefits must be built upon a partnership in which the two nations have a vertical division of industry, rather than a rivalry built upon horizontal competition. When Taiwanese industry began entering China, industry across the Strait was still in its infancy and had a scarcity of capital, technology and management experience. Taiwanese businesses took full advantage of the low costs and preferential policies and used China as a production base, which turned into a cooperative relationship with vertical divisions of labor.
However, China’s national power has increased significantly to the point where it has become the world’s second-largest economy. It no longer wants to be a production base for foreign enterprises. There have been huge policy changes as China nurtures domestic industry, forming the rise of China’s “red supply chain,” while it is adjusting its industrial structure. Theses changes are posing a great threat to Taiwanese firms in China.
Taiwanese exports across the Strait account for about 16 percent of GDP and approximately 39.8 percent of the export market. It is evident that the economy is highly dependent on China. However, cumulative annual exports contracted by 7.1 percent in the first half, with exports to China and Hong Kong shrinking by 8.6 percent, higher than the overall average.
The decline in exports to China is primarily due to the rise of the red supply chain. Since 2000, Beijing has progressively been cutting back on component imports, instead shifting toward domestic self-sufficiency, and Taiwanese and other foreign manufacturers in China are also shifting toward Chinese procurement.
Surveys showed that among 629 overseas manufacturers in China last year, only 38.6 percent purchased materials, semi-finished products or components from Taiwanese firms. This naturally hurts Taiwan’s exports to China. In addition, the proportion of domestic orders manufactured in Taiwan dropped to 47.4 percent, but the proportion of such orders manufactured in China rose to 47.1 percent, rapidly closing the cross-strait gap.
If this situation does not improve, Taiwan’s export orders manufactured in China will quickly surpass orders manufactured at home. These data highlight the risk of Taiwanese industry being hollowed out, partly as a result of the great challenge presented by the red supply chain, and partly as a result of domestic industry not transforming itself and expanding. The threat China poses is increasing, while reliance on China is deepening, leaving Taiwan in a difficult position.
In this imbalanced dependence framework, China’s stock market remains a threat to Taiwan regardless of whether it goes up or down. If it rises, it makes financing easier for Chinese firms, inflates their market value and becomes a monster that could expand production and undermine market prices, which could leave Taiwanese industry unable to compete. Having access to massive, low-cost capital to acquire other firms, purchase technology and lure talent would effectively be like conducting asymmetrical warfare on businesses worldwide. In a zero-sum game, Taiwanese firms would be the biggest losers.
Furthermore, the downturn in the TAIEX was due to some investors either buying Chinese stocks via private channels or purchasing China-related funds. The increase in the volume of Taiwanese stock trades is caused by investors speculating in Chinese exchange-traded funds. In the past six months, the value of domestically issued China-related funds has reached NT$50 billion (US$1.6 billion). Those investing in China have suffered heavy losses as stock prices have tumbled.
Taiwan has experienced numerous financial crises, but this is the most dangerous because it is a structural collapse, and it is the imbalanced economic reliance on China that will be the cause of a Taiwanese collapse. Perhaps economic and trade-based independence on China has brought short-term benefits and provided the Taiwanese comprador class — businesspeople functioning as intermediaries with China — with a dividend, but it has been at the expense of the economy.
The arrival of the Chinese stock market black swan should be a massive wake-up call for Taiwan. If political and business leaders do not come to terms with the seriousness of the threat, it is not hard to imagine the nation being reduced to an economic colony of China.
Translated by Zane Kheir
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