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Peggy Sito

Taiwan's reliance on trade and weakening domestic demand were to blame for a sharp dichotomy between first-half economic performances on each side of the Taiwan Strait, according to analysts.

As the mainland economy galloped on at just below 8 per cent in the first half, the island's gross domestic product dived to a 26-year low.

Taiwan's second-quarter GDP contracted by 2.35 per cent year on year. The mainland economy, by comparison, grew 7.9 per cent in the first six months.

Analysts yesterday attributed the contrast largely to the two economies' varying dependence on trade, especially exports.

Taiwan's trade-reliant economy has resulted in a far greater exposure to the ups and downs of the global, especially the United States', economic outlook.

'The mainland is a continental economy,' said Tao Dong, Credit Suisse First Boston regional economist. 'It is driven by a different cycle.'

Exports accounted for about 44 per cent of Taiwan's GDP, said HSBC chief economist George Leung.

Across the strait, exports make up a little more than 20 per cent of China's GDP, said a recent Salomon Smith Barney report.

Economists have slashed forecasts for US import demand in the year to next March by US$70 billion. The cut would drag Asia's regional GDP growth down 0.4 per cent, the Salomon report said.

In response to the global economic slowdown, mainland exports have plummeted to a year on year 14.6 per cent in the first quarter and 4.6 per cent in the second, down from the soaring 27.8 per cent growth last year. Mainland export growth, having sunk into the negative zone in June, has recovered to last month's 6.6 per cent year-on-year growth.

The effect on Taiwan, however, has been more devastating and consistent.

Taiwan's export orders have posted monthly falls in the first few months this year except in February, when they bounced back to the black due to seasonal factors. Taiwanese exports fell 28.4 per cent last month from a year earlier. Despite Beijing's calls to increase the weight of high value-added exports, analysts said China's predominantly lower-end exports had helped protect it from the global downturn.

'Because most of China's exports are still relatively low-quality and less tech-oriented, income elasticity of demand is usually low,' the Salomon report said.

Taiwan, however, has been hit hard by the bursting of the global dotcom bubble. Electronics, information and communications products account for 32 per cent of its exports, according to Morgan Stanley economist Denise Yam Wing-yan.

Mr Leung said high-technology or information-technology related products had contributed up to 80 per cent of Taiwanese exports.

Taiwan failed to bolster its economy through domestic demand amid the decline in foreign and domestic investments.

Taiwan saw a year on year 22.11 per cent fall in foreign direct investment (FDI) in the first half, while domestic investment dropped as manufacturers relocated their production to the mainland, Mr Leung said.

But China posted a 20.53 surge in actual FDI in the same period. China's vast domestic market can also help cushion the shocks. Mainland retail sales strengthened by 9.8 per cent last month, just below June's 10 per cent growth year on year.

The benchmark consumer price index rose 1.5 per cent in July from the same month last year, slightly higher than June's 1.4 per cent. Taiwan's private consumption, however, has been dented by rising unemployment, at 4.51 per cent in June.

According to Goldman Sachs, the island's domestic demand contracted 2.1 per cent year on year in the first quarter, against a 4.4 per cent growth for the whole of last year. Its performance was also undermined by a lingering property overhang, ING Barings greater China economist Craig Chan said.

Mr Chan predicted that Taiwan's economic growth would stabilise in the fourth quarter of the year, owing to an upturn in the US economy and a lower base for comparison.

However, economists warned that if the global slump persisted, its effect would eventually ripple through the Chinese economy.

They said the effect of a possible relaxation of trade links across the strait would only show positive effects on Taiwan in three to five years.

Taiwanese President Chen Shui-bian on Tuesday endorsed a proposal to lift the island's 52-year-old ban on direct trade and transport links with China.

Graphic: econ18gbz



Fortunes highlight cross-strait divide