TAIWAN
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As Asia’s fifth largest economy, Taiwan is a wealthy capitalistic modern economy where poverty is vitrually non-existent with less than one percent of the population living below the poverty line. With a relatively modest population of only 22.6 million, Taiwan has evolved into a major Asian Tiger building a prosperous powerful hi-tech export economy. The fruits of this economic advancement are now symbolically signalled to the world as of October 23, 2003 with Taiwan now home to Taipei 101, the world’s tallest skyscraper at 1,667 feet. Presently, Taiwan’s economy is recovering from recession with the domestic economy remaining in a mild deflation resulting in slightly higher unemployment and lower domestic & global demand. The terrorist attacks on the United States on September 11, 2001 greatly impacted Taiwan as the U.S. is an important export market. At present, Taiwan is the largest foreign supplier to the United States of silicon chips, semiconductors and computers. The Taiwanese economy is highly correlated to the success of the U.S. economy attributing to some of this lower demand for Taiwanese hi-tech components. In order to offset this collapsing U.S export market and to increase global competitiveness, Taiwanese businesses are migrating to mainland China where cheaper labor costs are prevalent in order to lower their cost structure.

POLITICS: President Chen Shui-bian since May 20, 2000 of the Democratic Progressive Party (‘DPP’) won the legislative election on December 1, 2001. He was elected president with a minority government, the first president from an opposition party. The powerful opposition party is the Nationalist Party (‘KMT’ or Kuomintang’) with its leader Lien Chan, the former vice president of Taiwan. The Nationalist Party is the party that has ruled Taiwan for the majority of time since its founding in 1949. President Chen and the DPP are pro-independence leaning, political ties were strained with mainland China when Chen took office. Next Presidential election is scheduled for 2004, much political theatre is to be expected with tough talk from both Taiwan and mainland China.

Taiwan is a self-governing island although China views Taiwan as a renegade province. President Chen has suggested that Taiwan’s constitution will be revised in 2006 to reflect complete statehold, more of a bargaining platform with China. It is important to note that nationalist name for Taiwan ‘Republic of China’ is not the same as Communist mainland China’s ‘People’s Republic of China’. In fact, Taiwanese passports are now called ‘Taiwan’ not the old name of ‘Republic of China’. President Chen has vowed for more public referendums on national issues.

ECONOMY: rebounding strongly from its its first recession during 2001 even as Taiwan maintains the 14th largest trading economy in the world. Even the economic fallout from the 1997-98 Asian fiancial crisis was minor compared to the global recession that struck Taiwan in year 2001 as Taiwan’s key export market in the United States cooled down. World Trade Organization (WTO) membership for Taiwan was formally received on January 1, 2003 which will help to promote closer economic ties and increased trade with mainland China. Neighboring China with a vast and inexpenseive workforce coupled with tax incentives provides for a low-cost manufacturing base for Taiwan’s entrepreneurs and export-driven industrialists including industry segment in technology as chip makers. Taiwan’s industrialists are shifting their manufacturing base and offloading their domestic wage structure to the cheaper mainland Chinese labor pool which will further make Taiwanese products more competitive globally. Moreover, recent restrictions on tourists from mainland China have been eased which will provide for a bounce in Chinese tourism to Taiwan in return for an easing of imports for mainland Chinese goods. Some critics suggest that Taiwan is too concentrated on tech and semiconductors at this present time. Taiwan is an economy dependent upon exports similar to Japan, exports in Taiwan represent 50 percent of GDP while exports to the United States alone represent 25 percent of Taiwan’s export revenue. Hong Kong/China and Japan are two other very important large export markets for Taiwanese products. Taiwan has recently countered by eliminating an investment tax to stir FDI in order to remain competitive with its Asian neighbors. With few natural resources, Taiwan is a petroleum importer at approximately 1 million b/p/d of oil with annual natural gas imports measured at 6.3 billion cu m for year 2001.

Economic Statistics
GDP as measured using purchasing power parity was at $406 billion USD (2002) with corresponding GDP/Capita at $18,000 USD (2002). GDP growth for year 2001 recorded its first year of negative growth since independence by declining 2 percent due to a large drop in international demand for electronic products as the global economy entered recession. These significant declines in industrial output for Taiwan in year 2001 is in contrast to year 2000 where the GDP grew by a strong 6.2 percent and year 2002 rebounded smartly with a healthy GDP growth of 3.5 percent and year 2003 at 3.15 percent while year 2004 growth is projected at 4.5 percent. Year 2002 inflation was slightly deflationary at negative 0.2 percent, year 2003 was also flat at negative 0.3 percent, year 2004 estimated at plus 1 percent due to an increasing mainland China inflation threat. Current account surplus came in at a stunning 8.1 percent of GDP for 2003, both year 2000 and 2001 recorded a modest 1.7 percent surplus, year 2002 at 6.9 percent. Taiwan runs large trade surpluses, year 2002 exports came in at $130 billion USD while 2002 imports at $113 billion USD reflecting a $17 billion USD trade surplus. Taipei bourse has performed very well in 2003 up 32 percent to the 5850 level. External debt is modest at $24.7 billion USD (2002) while the fiscal account is satisfactory. Unemployment is low at 5.2 percent (2002). Major trade partners include the United States, Japan, China, South Korea and Hong Kong. Industry segments include services at 67 percent, industry at 31 percent and agricultural at a very small 2 percent.

POSITIVE: flexible industrial structure with current excess capacity, low foreign external debt which is one of the lowest in the region, average life expectancy of 77 years, APEC member. CONCERN: currency counterfeiting has increased significantly - potentially up to 2 billion TWD in circulation, weather patterns such as typhoons and major earthquakes can be devestating to Taiwan, few natural resources, environment- pollution, domestic consumption problem with heroin and methamphetamines.

BANKING SYSTEM: sound but are banks overexposed? September 2001 saw banking reforms implemented as many smaller financial institutions with high overdue loan ratios were absorbed by larger Taiwanese banks, consolidation of the banking sector as layoffs are taking place in order to increase efficiencies. Bank mergers coupled with some large government banks becoming privatized are underway, asset securitization and holding companies are in process to help banks burdened by NPL’s (non-performing loans) which is estimated upwards of 15 to 20 percent of the lending portfolio for year 2002 which was a difficult year following the tech meltdown in year 2001. Taiwanese banks are vulnerable to a large decline in the stock market although they are now diversifying with many now having branch operations in mainland China. The pillar of strength and support for the new Taiwanese dollar is the massive foreign exchange holdings of Taiwan at an impressive $203 billion USD as of November 2003, the world’s third largest position. Taiwan’s Central Bank “The Central Bank of China” (CBC) have allowed the currency to avoid strong appreciation pressures to maintain competitiveness of Taiwan’s exports versus Japan’s. The CBC is now the sole issuer of New Taiwan Dollars after July 1, 2002. Interest rates are very low with Taiwan’s rediscount rate that is used by commercial lenders for 10-day loans steady at 1.375 percent.

REGIONAL ANALYSIS: Japan, China, Asia
Japan’s yen is appreciating while the Bank of Japan is intervening massively to stem the rise. Japan and South Korea both compete in the same export markets as Taiwan. The risk for another 1997 Asian currency crisis is low to moderate. Asian countries and their economies are performing quite well with many Asian currencies set to encounter further appreciation pressures going forward in 2004-05. During the 1990’s, Taiwan’s businesses invested over $100 billion USD into China mainly via Hong Kong. China is now Taiwan’s largest export market and FDI destination especially in the area of providing parts & equipment for assembly in China.

KNOWLEDGE: CHINA - TAIWAN
The lively debate over reunification or independence for Taiwan continues with some observers suggesting Taiwan enter the mainland Chinese family similar to Hong Kong as a special region “one nation, two systems.” Taiwan already enjoys most benefits of a sovereign nation except it does not have official diplomatic recognition from most of the world including the United Nations. Mainland China controls neither external or internal policy in Taiwan. Former President Zemin of China gave a 50 year time frame for reunification with China. Beijing considers Taiwan a part of China and has at times over the last few years flexed its military muscle with the threat of a mainland Chinese military takeover with Chinese naval demonstrations in the Taiwan Strait more recently on November 19, 2003 with its renewed pledge of threat of war to Taiwan, its first time since year 2000. This tough talk and military demonstrations from China are designed to counter balance Taiwan’s independence movement as China says it will declare war on Taiwan if it should decide to suceede with much political theatre expected with the upcoming March 2004 presidential elections in Taiwan. President George W. Bush of the United States is committed to the defense of Taiwan although his administration prefers the peaceful status quo of Beijing and Taipei. The Taiwanese opposition party KMT is more open to some sort of reunification with China than the current DPP party. President Chen is politically making strategic steps for Taiwan to seek greater independence as Taiwan currently enjoys de facto autonomy from mainland China. Chen plans for a spring 2004 referendum vote on whether China should end the missile build up across the Taiwan strait and surprisingly, US President Bush is against this vote.

Presently, Taiwan is slowly opening up to China with the recent removal of an investment ceiling, bridges & ferry’s to the mainland, increased Chinese tourists, both postal and other economic trade links. As the debate and political debate continues between both nations, there economies are in in the midst of a silent integration, although politically they don’t chat. With time, economic integration will prevail over political disagreement.

In the long term, the two regions will ‘feel’ like one country when mainland China increases its standard of living equivalent to Taiwan. Will this prevail or will Taiwan be coerced or adopt politically a solution similar to Hong Kong of “one nation, two systems” or in Taiwan’s case, “one nation, three systems”? In Hong Kong’s case, challenges and political difficulties remain with mainland China. Other sources have suggested that China in discussions with the United States suggested China would never allow an independent Taiwan but only support a peaceful reunification. Taiwanese politicians who support independence argue that Taiwan maybe better off by pursuing the independence card after seeing the difficulty Hong Kong is encountering. The debate continues, but war is very unlikely.

CURRENCY:
ISO Symbol ‘TWD’, new Taiwanese dollar is the official currency of the Republic of China (Taiwan). At the time of review on January 5, 2004, the exchange value for the new Taiwan dollar is at 33.85 TWD to 1 US-dollar (‘USD’). The 1997 Asian financial crisis resulted in a relatively modest 20 percent depreciation of the new Taiwan dollar when compared to other regional currencies. The 1990’s were a decade of stablity for the new Taiwan dollar as the currency held its own in global purchasing power. TWD to follow movements in the Japanese yen closely although the exchange regime for the new Taiwan dollar follows a managed float whereby CBC (Taiwans’s Central Bank) will only intervene in exceptional situations.

CURRENCY HISTORY: the currency was first issued in the early 1950’s after the evacuation of the Republic of China government to Taiwan. Historical valuations include: October 1983 at 39.42 TWD to 1 USD, January 1985 at 39.2, January 1987 at 35.3, January 1988 at 28.62, May 1989 at 25.78, January 1991 at 27.19, 1992 at 25.4, January 1994 at 26.49, January 1995 at 26.29, 1996 at 27.5, July 1997 at 27.95, October 14/1997 Taiwan devalues the TWD, January 1998 at 33.74, August 1998 at 34.67, 1999 at 31.6, 2000 at 33.09, 2001 at 34.74, 2002 at 34.88, January 2003 at 34.51.

CURRENCY FORECAST: new Taiwan dollar should strengthen slightly in year 2004-05 to the USD due to its decline but the TWD may depreciate slightly versus other currencies including the euro and Japanese yen if Taiwan experiences persistent deflationary conditions. The economic fortunes for the United States are not favorable as BI.C predicts the delayed phase two recession for the United States which may hit in 2005 to be known as the asset liquidation phase in America. The decline in US export markets will be more than offset by a growing market in mainland China. Mainland China ironically will be the saviour for the Taiwanese economy as much evidence supports this view with tens of thousands of Taiwanese setting up businesses and manufacturing plants within the mainland now home to over 800,000 Taiwanese citizens. China is forecasted to have strong economic growth in the years to come as it achieves a higher standard of living as many analysts suggest that a yuan revaluation will be re-pegged at upwards of 40 percent higher than its current valuation of 8.28 CNY to the USD towards a valuation of 5.0 CNY. This currency re-alignment will provide for additional appreciation pressures to the TWD going forward although short term capital outflows may persist for investments into China. In the long term, a new regional currency bloc may take hold that whereby both Taiwan and Hong Kong join China in a currency union similar to the developments that have taken hold in Europe with the Euroland euro.
UPDATED: January 5, 2004

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