Taiwan Needs Planned Response to Mainland Economic Slowdown
China Times editorial (Taipei, Taiwan, Republic of China)
April 21, 2014
Summary: Cross-Strait inter-industry competition will gradually eclipse
cooperation. At this point, the government may wish to convene a private
entrepreneurs summit, drawing on industrial heavyweights from both
sides of the Strait. They could promote cross-strait economic strategic
dialogue and policy coordination within the ECFA framework. They could
transform competition to cooperation, and enable cross-Strait industrial
transformation and upgrading for mutual benefit.
Full text below:
The Mainland government's National Bureau of Statistics has released its latest statistics. This year's first quarter GDP growth was 7.4%. This represents a 0.3% decline over the fourth quarter. It also falls below the 7.5% official target. If the Mainland continues experiencing an economic slowdown, is there the risk of a hard landing? What impact will a slowdown have on the RMB exchange rate and international capital movement? Taiwan and Mainland China enjoy increasingly close economic and trade relations. What challenges will the Mainland economic slowdown bring? How should Taiwan respond? These and other related issues have attracted widespread concern that must be explored in depth.
Mainland GDP growth in 2011 was 9.2%. Since then however it has been on a downward slide. GDP growth in 2012 and 2013 slipped to 7.8% and 7.7% respectively. During the National People's Congress in March this year, the government set the economic growth target at around 7.5%. Premier Li Keqiang stressed that some deviation is tolerable. But the precondition is full employment. This reflects the fact that the Mainland economy has fallen significantly from a high growth rate over 9%, to a medium growth rate under 8%.
There are two main reasons for the Mainland's continued economic slowdown. One. The original growth model was highly dependent on exports and investments. Changes in the environment, both inside and outside the Mainland, have made this model unsustainable. Two. The original large-scale policy measures to stimulate economic growth led to serious overcapacity and financial bubbles. These too proved unsustainable. Last year the International Monetary Fund (IMF) released a report. It warned that if the Mainland did not accelerate reforms, by 2020 economic growth could fall to about 4%. This is why once Xi and Li took office, they deepened reforms and sacrificed GDP growth. They traded short-term economic pain for long-term economic gain.
But the biggest problem facing Beijing currently is that deepened reform has led to a gradual slowing of economic dividends. The new government cannot make up the difference by means of "deleveraged structural adjustment" austerity measures. As a result economic growth has fallen to 7% or less, and the risk of a hard landing has increased. Given this increasingly serious situation, the Mainland's State Council introduced micro level stimulus measures earlier this month. On Wednesday it announced a cut in the reserve ratio for some farm and commercial bank deposits. If the second-quarter economic situation continues to deteriorate, further economic stimulus measures and loose monetary policy will become a necessary evil.
Substantial reductions in export growth and the trade surplus have made devaluation of the RMB exchange rate one of the policy tools Beijing may use for funding.Last month the People's Bank of China increased the float range for the RMB exchange rate. It used this to devalue the RMB up to last week. The RMB depreciated against the U.S. dollar by 2.8% over the year. This nearly matched the 2.9% depreciation last year. This should have a stimulus effect on exports. But recently the U.S. Treasury publicly expressed dissatisfaction with the Mainland, saying it has undervalued the yuan. In its semi-annual report it called the the decline in the value of the RMB "unprecedented." The United States is clearly worried that the prolonged rally of the RMB may change directions. The Treasury tried to pressure Beijing to put the RMB exchange rate back on the growth track. But it is generally believed that the Mainland's economic slowdown means the yuan will fall not rise. This fall cannot be expected to turn around and rise again until the second half of the year.
The RMB exchange rate has gone from endless appreciation in the past to alternating appreciation and depreciation in the present. Capital flows are key influences. In the past a steady stream of hot money flowed into the Mainland. This flow is reversing itself. This is sure to increase overall financial risk on the Mainland. It is sure to affect local bonds, corporate bonds, the housing bubble, and shadow banking. It is sure to increase the number of economic variables.
The Mainland has the world's second largest economy. Its economic growth rate has a significant impact on other Asian countries and emerging markets. Taiwan serves as both as a factory and market for the Mainland. The impact on its economy may be even more severe than it is for others. Therefore the government must prepare. It must attract Taiwan investments in the Mainland back to Taiwan. It must take advantage of the change in Mainland as OEM Factory export model. It must help Taiwan businesses expand into alternative markets, and establish a global presence. This two-pronged approach will help Taiwan businesses stabilize export markets and global supply chains.
Meanwhile, the Mainland's economic growth has slowed. To a considerable extent, economic restructuring and adjustment are transient phenomena. Taiwan has advantages and disadvantages. On the plus side, although Mainland industrial production has slowed, it enjoys relatively strong growth in the service sector. The proportion of GDP in the service sector continues to rise. Therefore Taiwan must take advantage of this trend. It must make use of its service sector advantages to develop the Mainland market. This will enable it to breakthrough the bottleneck of the domestic service industry. From this perspective, the importance of the STA should be self-evident. We must complete Legislative Yuan review as soon as possible, so as not to miss any opportunities.
On the minus side, the Mainland is undergoing "structural adjustment." It is actively promoting industrial restructuring and updating. It is focused on nurturing new industries, including high-end equipment, green energy, biotechnology, and next generation information and communication industries. These are very similar to Taiwan's main industries. Cross-Strait inter-industry competition will gradually eclipse cooperation. At this point, the government may wish to convene a private entrepreneurs summit, drawing on industrial heavyweights from both sides of the Strait. They could promote cross-strait economic strategic dialogue and policy coordination within the ECFA framework. They could transform competition to cooperation, and enable cross-Strait industrial transformation and upgrading for mutual benefit.
2014年04月21日 04:10 中國時報 本報訊