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Taiwan's ambiguous recovery

The Taiwan presidential election victory of opposition Nationalist Party (KMT) candidate Ma Ying-jeou a year ago was expected to bring an upsurge in trade with the mainland resulting from increased economic integration across the strait - that was one of the winner's campaign promises.

The island's stock prices, gauged by the Taiwan Stock Exchange Composite (TSEC) index, rose to 8,524 from 8,161 in the week before the March election on anticipation of the KMT victory, hit 8,865 the day after and continued to climb, after some consolidation, to 9,295 on May 19, 2008 - the day before the inauguration. That level has not been equaled since.

That could be seen as a classic case of "up on the rumor, down on the news", but it also reflects the extent of the global financial crisis and a broader secular trend. The TSEC declined in waves over the next six months, bottoming last November 20 at 4,090, after which it rose to occupy a broad trading range around 4,500 until the beginning of last month. It then peaked at 5,390 on March 27, before falling back to the low 5,200s, a level still significantly above its earlier trading range.

All well and good - yet Taiwan's economic situation continues to worsen. Gross domestic product (GDP) fell 8.4% in the fourth quarter of 2008 compared with a year earlier, attesting that a significant recession has begun. Government estimates expect the decline to continue into the second half of this year, with an overall 3% economic contraction for 2009.

The origin of the downturn was in the drop in net exports due to decreased external demand, but domestic demand has stagnated. In fact, the rate of growth in Taiwan's economy had been decelerating for over a year. The only categories of increasing growth are public investment and government consumption. Private capital investment has fallen sharply.

Even so, Taiwan's export balance has improved. In December, exports were down 41% from 12 months earlier, and in January were down 44%. That decline has slowed, at least in February, when exports were down only 29% from a year earlier.

Declines in world demand for laptop computers, mobile phones and computer chips account for much of the fall in exports, although until a year ago increased demand from Southeast Asia, India and China more than compensated for decreased demand from the United States. The improvement in the figures for February is attributed to smaller declines in demand from China.

First-quarter statistics for 2009 are expected nevertheless to show sharp overall declines. Export orders in the second quarter are expected to improve, but remain well below zero while any rebound may be due only to restocking orders.

In the present economic situation, Taiwan is seeking to promote a merger of its memory-chip manufacturers. Despite the fact that a merged corporation could control 22% of global market share for dynamic random access memory (DRAM) chips, in the same league as South Korea's two big manufacturers, the government does not seem to wish to subsidize to any great extent such a consolidation, not least since the national economy has little experience in this type of inter-organizational integration.

It is more likely that the government will seek indirectly to promote such a fusion by creating conditions for third parties to act. Success in implementing such a framework plan is not guaranteed. Its failure may be the catalyst for a further decline of the TSEC index in the medium- to long-term future.

Indeed, JP Morgan Chase has just raised Taiwan's stock market from neutral to overweight, justifying the change by reference to fundamentals and an optimistic view of the effects of interest rates and fiscal policy. However, reports by different firms dispute whether foreign investors have actually become net buyers in the Taiwan market. Taiwan's dollar, now valued at just under 34 to the US dollar, is closing out its third consecutive quarterly loss (according to Bloomberg News, its longest losing streak in seven years) and is projected to decline at least through the first half of this year if not throughout most of the year, as investors seek safe havens and forsake emerging markets.

The TSEC appears now to be pulling back from the first wave of a multi-month run-up. It has good short-term support at 4,700 and significant long-term resistance at 7,000 (actually a range from 7,002 to 7,326, the latter figure probably marking the upper bound of the lengthy run that it looks poised to make). The midpoint of that range is 7,162, or 61.8% above the 4,426 mark from which it began its ongoing medium- to long-term run after meandering back and forth between 4,090 and 4,727 during the last two months of 2008.

The progress of this run will, however, hardly be monotonically upward, and it may not reach the upper bound. There are significant resistance levels from past years between 5,400 staggered up to the low 7,000s, although none of them was confirmed (by functioning as a support on the way down) during the index's vertiginous decline over the last year.

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URL:  http://www.robertcutler.org/blog/2009/04/taiwans_ambiguous_recovery.html
First published in Asia Times Online, 2 April 2009.

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