11 June 2018
Taiwan: Trade growth stronger in May but fundamentals weak

Taiwan's export and import growth look good because of the low base last year but the data confirm our view that the economy isn't particularly strong

With a low base last year, export and import growth rates look good, at 14.2% year on year and 12% YoY respectively, up from 10% YoY and 4.9% YoY.

But China continues to be essential to Taiwanese trade even following the set up of big Taiwanese handset factories in the US. Mainland China, together with Hong Kong, is the biggest trading partner of Taiwan, accounting for around 38% of total exports. Exports to China and Hong Kong grew by 19.3% YoY, beating Taiwan's export growth to the US at 13.5% YoY.

Looking forward, trade prospects dim

But the low base technical effect won't last. From June to September, there will be high base effects, so even if the global trade environment remains the same, Taiwan export growth prospects will dim over the coming months.

An additional factor is that more Mainland Chinese tech companies are under US investigation for "national security" reasons, which seems to be delaying the growth of the whole technology industry and this, in turn, lowers demand for electronic goods - the biggest item of Taiwanese trade.

This suggests that Taiwan's trade growth will slow over coming months.

Forecast USD/TWD at 30.0 by end of 1H18

Today's data confirms our view that Taiwan's economy is not particularly strong.

Given the strong dollar and political uncertainties in Europe, we expect USD/TWD to weaken to 30.0 by the end of 1H18. 

We are reviewing our USD/TWD forecast for the end of 2018, which is currently 29.40. 

Japan: The pause that refreshes

The 1Q18 slowdown was likely only a pause, nothing more, and we anticipate activity strengthening in 2Q18 - barring disasters, such as an all-out trade war

A good-old-fashioned inventory led downturn

In times gone by, when economics still largely worked, central banks maintained a positive interest rate and money printing was considered heretical; there used to be a periodic business cycle. 

This was no bad thing. With every period of growth, along with the beneficial effects such as rising wages, and profits, there would also be some negative spillovers, such as an accumulation of unproductive activity, capacity or inventories. Every five to seven years or thereabouts, there would be a mild downturn or recession. Some jobs would be lost, and some firms would go bust. But the liberated capital and labour from this downturn would mostly be re-shuffled into more productive uses to fuel the next up-leg of the business cycle. In much the same way that we sleep at night to rejuvenate, or tides wash away and refresh the waters along our coasts, the negative short-run aspects of recessions were made up for by the post-recession benefits.

Japan seems to be undergoing just such an old-fashioned inventory cycle right now.

China: Strongly against a trade war

The US's changing stance towards China is a reflection of its concern about the rise of China. If the US continues its hostility towards "Made in China 2025", future trade negotiations could look rather futile

Trade talks could be futile if the US continues to impose tariffs and sanctions on China

China has become increasingly irritated by a US administration that keeps changing its mind on tariffs. Results from previous negotiations have been taken off the table until the US cancels it’s planned tariffs on China. Media reports suggest that the US could announce its tariff plan by mid-June.

If the US follows through with its plan to announce sanctions on high-tech Chinese goods and related businesses before the end of June, it's also likely that China will take a similar approach to US businesses operating in China.

Clearly then, June looks set to be a tense, rollercoaster month for China-US trade and investment.

Reading time around about 4 minutes

Good MornING Asia - 11 June, 2018

Canada's Trudeau comes in for the brunt of Trump's Ire, as US distances itself from the G-7 communique

In this bundle