Smooth Sailing in Cross-Strait Trade?

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China-Taiwan trade statistics for 2016 were released earlier today.

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Amid fears that cooler ties between Beijing and Taipei may be hurting the Taiwanese economy, there are signs that trade across the Taiwan Strait remains stable.

Taiwan state media reported this morning that the value of Chinese investments in Taiwan lifted 1.5 percent to US$248 million in 2016. While Taiwan’s Chinese imports declined 2.8 percent to US$44 billion and total trade across the Taiwan Strait dipped by 0.7 percent, Taiwan’s exports to China were up 0.6 percent to US$73.9 billion, Central News Agency (CNA) reports.

CNA, quoting figures from Taiwan’s Mainland Affairs Council, also noted that Chinese visitors to Taiwan dropped sharply last year, down 16 percent to 3.47 million. However, the impact of slower cross-Strait tourism in 2016 is expected to have been offset by a boost in tourists from Japan, South Korea and Southeast Asia. Taiwan saw a record 10.69 million tourists last year, up 2.4 percent from 2015.

The release of the cross-Strait economic statistics follows conjecture among international commentators about whether Beijing had moved to hurt the Taiwan economy, after a more China-friendly government was voted out of power in January 2016. Beijing froze official communication with Taipei after President Tsai Ing-wen (蔡英文) and the Democratic Progressive Party took office in May 2016, and China continues to block Taiwan's participation in international fora.

Ross D. Feingold is an analyst who advises clients on political risk, including Taiwan-China relations. He notes that a slowing Chinese economy would likely result in falling imports from Taiwan and other countries, but the key question is whether the current state of China-Taiwan relations depresses what could be a larger amount.

“We can only speculate, though President Tsai Ing-wen has consistently called for Taiwan industry not to become overly reliant the China market,” he says.

On Chinese inbound investment into Taiwan, Feingold notes that while there has been an increase, it remains “modest” compared to investment in Taiwan from Japan, the United States, European Union, and Taiwan-owned capital from overseas that is invested in Taiwan.

“This is not necessarily due to the state of China-Taiwan relations. Rather, the lack of investments attractive to Chinese companies, and a challenging regulatory environment for foreign, including Chinese, investors attempting large acquisitions,” he adds.

Feingold suggests there may also be an impact from Taiwan’s regulatory environment, as it relates to investment from China, and that this may mean Chinese companies are reluctant to attempt large investments in Taiwan.

“In 2015, China’s Tsinghua Unigroup attempted to purchase stakes in Taiwan chip testing companies Siliconware Precision Industries and ChipMOS Technologies but despite commitments to follow applicable Taiwan regulations on Chinese ownership caps or technology transfers, regulatory agencies in Taiwan were uncomfortable with the transaction,” he says. “The two Taiwan companies lost market access opportunities in China that the deal proposed to generate. Earlier in 2009, China Mobile announced its intention to purchase a stake in FarEastone, but after four years of seeking regulatory approval the parties gave up.”

Still, there have also been several positive indicators for the economy under Tsai’s watch. Last October, global rating agency Fitch Ratings upgraded its view on Taiwan to reflect the stable outlook under the new administration. And the government and ratings agencies expect modest real GDP growth through 2017. So, should today’s cross-Strait trade statistics alleviate fears of a Chinese economic backlash against Taiwan?

“Whether or not the fears around China’s economic backlash against the Tsai administration have eventuated yet depends on who you ask,” Feingold says. “Tour agencies, hoteliers and other stakeholders in the tourism industry, along with employees, are impacted by the reduction in tourists and have made their views known via public protests. Companies that have lost procurement opportunities with Chinese buyers, and Taiwan companies in China facing regulatory scrutiny, also feel there is a backlash.”

But there is also evidence that Chinese investments in Taiwan have picked up pace this year. Taiwan’s China Post reported last month that 21 Chinese direct investments projects in Taiwan, valued at US$6.4 million, were approved by regulators in January, a 37 percent increase from January 2016.

Asked whether cross-Strait trade has changed again this year, Feingold says attractive acquisition targets in Taiwan for Chinese companies are limited, and large transactions come with Taiwan’s regulatory scrutiny, which makes closing a deal difficult.

“In 2017, domestic economic policy is causing Chinese regulators to slow or reject approval of large outbound investments whether to Taiwan or other countries,” he says. “Thus this year, the metrics to watch will be the same as recent years; the sale of goods in each direction, tourism flows, and Taiwan investment in China, all of which are susceptible to both political factors as well as global economic conditions.”

He adds that investors will be watching for whether President Tsai reiterates this year that China is an economic competitor.

“And if she does, how Taiwan’s industry leaders and policy-makers react to that.”

According to the Council on Foreign Relations, more than 93,000 Taiwanese businesses have invested in China since 1988. Reciprocal Chinese investment by Taiwanese firms has also increased, totaling US$34.5 billion between 2008 and mid-2015, the U.S.-based think tank says.

Editor: Olivia Yang

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