THE latest round of mainland Chinese military exercises near Taiwan in advance of the island's first direct presidential election on March 23 has further depressed stock and property markets and sparked an outflow of hard currency. But despite the gloom, some local economists and businessmen say Taiwan's strong export sector, its huge foreign exchange reserves, hopes for calmer cross-strait relations after the poll and even its pluralistic society will sustain the economy. Nine months after Beijing began its weapons and words offensive against President Lee Teng-hui of the ruling Kuomintang, there is no shortage of worrying indicators. The stock market continues to hover at about 4,800 points; expansion in the money supply remains at record low levels with annual M2 rising only 7.84 per cent in January; and growth in the volume of bank loans was minus 0.35 per cent in January, the first negative figure since December 1985. The island's foreign exchange reserves have declined from US$100.4 billion at the end of June 1995 to 'only' US$89.6 billion in January this year. But the economic news has not been all negative. Merchandise exports continue to show strong growth, rising 14.9 per cent to US$18.3 billion during the first two months of the year. Imports rose 9.7 per cent to US$16.6 billion, leaving a surplus of US$1.68 billion, the finance ministry reported. Economists and business leaders believe local citizens are responding to the pressure reasonably calmly, despite the publicity given to a two-day spree of panic buying of US dollars last week. The government has moved to maintain market confidence through a NT$200 billion (about HK$55.79 billion) stock market stabilisation fund set up by banks and insurance companies last month, and by jaw-boning leaders of large enterprise groups to stay active in the market. Last week it opened the stock market to foreign individual investors and mutual funds and lifted the ceilings for foreign purchases of stock in individual listed companies from 15 per cent to 20 per cent. The Central Bank of China's decision on March 7 to slice the required ratio of deposits banks must reserve at the central bank also will ensure an abundant supply of capital and counteract any impact of the capital outflow. Dr Chen Po-chih, a research fellow with the private Taiwan Institute for Economic Research (Tier), said the missile tests were intimidating, 'but still only a minority are so worried that their behaviour will change. Most people are still working and making money'. 'The nine months of pressure has held our economic growth rate down to 6 per cent, but that's still not bad compared to most other countries.' Dr Chou Chi, director of the economic prospects centre for the Chung-Hua Institution for Economic Research (Cier), said Taiwan's healthy exports and the related fillip to industrial production were underpinning a modest revival of the economy's leading indicators, even though first-quarter economic growth may not improve on the 4.9 per cent growth in real GDP in the fourth quarter of 1995. 'The mainland is firing missiles at Taiwan, and Taiwan is using its capital, or 'silver bullets,' to defend itself,' Mr Chou said. Dr Lin Chung-cheng, a research fellow in economics at Taipei's Academia Sinica, said: 'Conditions will remain all right so long as the government can continue to guarantee that all markets, including for stocks or foreign exchange, will function normally.' The fund manager for Jardine Fleming Taiwan Investment Management, George Hou Ming-fu, said: 'The stabilisation fund has so far had some positive effect on investors.' By the end of trading yesterday, participants in the fund had thrown over NT$20 billion into the market and succeeded in keeping the Taiwan Securities Exchange index at 4,809.51 (up 4.42 points on Saturday), just above the reported target level. 'We can see that the turnover in the past few days hasn't been very high, which indicates that people do not feel a great urgency to sell off their stocks,' Mr Hou said. But not all agree with the government's moves. Dr Wu Hui-lin, a research fellow at the Chung-Hua Institution for Economic Research, said: 'This fund will create a major distortion in the market mechanism. 'Since it is a very sensitive market, people with little confidence will of course dump stocks when unfavorable conditions arise. Mr Wu said: 'The fall in stock prices is exactly the cost that should be paid by people who dump stocks for cash because they lack confidence in Taiwan, and those that remained calm should be rewarded by taking their profits after the crisis ends. 'The support of this fund will reverse this and reward those who lack confidence.' Mr Hsueh Wei-chung, chairman of the China Bills Finance Corp, believes that the mainland cannot sustain an extended campaign of intimidation. 'Foreign investors on both sides of the strait and the mainland economy itself would also be hurt if this goes on for long,' he said. Mr Lin said: 'The stock market has declined, but hasn't collapsed and reactions in society generally are basically rational and reflect a basic degree of confidence. Beijing may feel that . . . people will turn against [President] Lee, but people here are not like those under the old Kuomintang on the mainland or in Hong Kong. 'While our open society may be noisy with different views, it can also display a kind of pluralistic stability, and a sense of resistance and anger is building up.'