Accompanied by much political clamor, two pandas, Tuan Tuan and Yuan Yuan, left Sichuan for their new home at the Taipei Zoo in mid-December. It was a significant statement of goodwill from Beijing to the island it regards as a renegade province.
More mischievous observers might have been tempted to ask, given giant pandas’ almost insatiable hunger, whether Taipei welcomed the additional food bill.
The island’s economic prospects for 2009 are grim. Its economy declined by 1.02% year-on-year in the third quarter of 2008, the first contraction in more than five years. A sharper fall was in the cards for the fourth quarter, with exports down a mammoth 42% in December.
Taiwan’s cabinet-level Council for Economic Planning and Development forecasts GDP growth of 2.5% this year. The World Bank’s estimate, made in mid-December, was similar. Most others are not so optimistic, and some expect a contraction.
"The writing is on the wall and many people will revise their numbers downwards," said Sean Yokota, a Hong Kong-based economist at UBS. Yokota predicts a contraction of 1.9%.
Chance of a rebound
Dr Chen Miao of the Taiwan Institute of Economic Research (TIER) admits that the institute’s projection of 4.11%, which was made in November, was far more bullish than it would be now.
Nevertheless, Chen is less pessimistic than most. He notes that negative growth toward the end of 2008, together with government stimulus efforts – each of Taiwan’s 23 million residents will receive a US$120 shopping voucher, and construction projects worth US$12 billion are in the pipeline – offer a low base and a useful trampoline from which to stage a rebound this year.
These sentiments are echoed by Cheng Mount-cheng, chief economist for Citibank Taiwan. He predicts growth of 1.5% with an added boost from stronger exports in the second quarter as companies restock in response to a revival in consumer confidence.
"I also think that cross-strait relations will provide some stimulus during this global slowdown," Cheng said.
The extent to which deeper cross-strait ties could have a short-term impact on Taiwan’s economic prospects is not so much contentious as confused.
Direct air, shipping and postal links resumed on December 15 after an almost 60-year hiatus. Subsequent talks between the two sides focused on creating a financial supervisory and currency clearance system to allow Taiwan’s banks to offer renminbi services on the mainland.
Beijing also pledged US$19 billion in soft loans to Taiwan companies operating in the mainland and promised to buy US$2 billion-worth of flat-panel displays from Taiwan manufacturers.
According to Andrea Wu, president of the American Chamber of Commerce in Taipei, some chamber member companies are already saving money due to more competitive transport costs brought about by direct links. Life has also become easier for businesspeople traveling between Taiwan and the mainland. But neither factor is expected to significantly affect Taiwan’s economy this year.
"Links are great, but when you have total world trade slowing dramatically these things don’t have a big impact," said UBS’s Yokota.
Even talk of the soft loans is tinged with skepticism.
A Moody’s Economy.com research note, dated December 23, observed that the handouts are "not only of charitable character." The firms that will benefit contribute tax revenue and jobs to China’s economy, with much employment coming from struggling manufacturers.
Mutual benefits are no bad thing, but Dr Tung Chen-yuan of National Chengchi University, who served as vice chairman of the Mainland Affairs Council (MAC) during the last Democratic Progressive Party administration, questions the effectiveness of the policy.
"In 2006 the Chinese government said it would provide US$900 million to assist Taiwan businesses, but Chinese banks don’t have credit records for Taiwan firms, so they ended up lending very little," Chen said.
To Dr Diana Tsai, an economics professor at National Sun Yat-Sen University, this is further evidence of how the absence of a systematic relationship or a formal platform for trade and investment is hampering cross-strait exchanges.
It is something the Kuomintang government is trying to address.
Should an agreement on financial services be signed this year, as is widely expected, Taiwan banks would be able to better serve their existing domestic clients in the mainland as well as target new business, which would remove the financing bottleneck.
Treaties and taxes
Dr Chao Chien-min, who replaced Tung as vice chairman of the MAC, told CHINA ECONOMIC REVIEW that an investment protection treaty also features on Taipei’s agenda. It would enable the government to extend assurances to domestic investors who have put money – believed to total anything between US$200 billion and US$400 billion – into the mainland.
In addition, Chao is keen on legislation that removes double taxation liability for Taiwan people living and working in the mainland, and closer cooperation with Beijing on crime fighting.
There is no perfect solution. Chen of the TIER remains concerned that the developments will push Taiwan companies deeper into China rather than promote inward investment. Others fret that Taiwan isn’t doing enough to define itself as an investment location in Asia and risks becoming over-dependent on China.
In the short term, however, the island’s hopes may rest on Beijing extricating itself from its own economic difficulties. Yokota of UBS notes that Taiwan’s export decline is as much a product of falling demand for materials and chemicals used for construction in China as it is slower DVD player sales in the US.
"China can help Taiwan the most by helping its own economy," he said.
Tentative links: Slow start for tourism
For all Beijing’s expressions of goodwill following the election of the Kuomintang government last year, some observers remain nonplussed by the results.
"There was some disappointment regarding the progress made in 2008 and this was because [Beijing] approached the process quite cautiously," said Cheng Mount-cheng, chief economist for Citibank Taiwan.
This is most visible in the development of cross-strait direct links. Direct passenger flights rose from 36 per week in June to 54 in December when full direct links were restored and, most recently, 108. Even then, it wasn’t until early January that the airlines decided to operate at full capacity, said Dr Chao Chien-min, vice chairman of the Mainland Affairs Council (MAC).
Chao’s predecessor at the MAC under the Democratic Progressive Party, Dr Tung Chen-yuan, believes 108 passenger flights per week and 68 direct cargo flights per month is still insufficient to satisfy a trade relationship that was worth US$120 billion last year.
He is also critical of the mainland’s policy on tourism. When direct links returned, there was talk of 3,000 mainland visitors each day to Taiwan. In July, fewer than 200 tourists arrived in Taiwan daily. The total crept past 400 in November.
"They talk about a lack of interest or travel costs being too high, but the real problem is Beijing controlling the flow of tourists into Taiwan," said Tung.
Chao stresses that 3,000 was always the ceiling, not the target, but he admits disappointment at the low numbers, and claims that solutions were agreed upon at the most recent cross-strait talks. The minimum number required for a tour group has been cut from 15 to five, the deposit visitors must place with travel agents has been reduced and the number of airports running services to Taiwan has increased.
"The Lunar New Year period is looking pretty good," Chao said. "Flights are already being booked by tourists."