Monday, March 20, 2006

No escaping politics

In Taiwan these days, with the next presidential election already on the horizon, discussion of economic questions and virtually everything else has become highly politicised. The administration of the president, then Shui-bian, who will be standing for a second term early next year, feels under heavy pressure to boost economic performance and cut unemployment.
But the opposition parties, which still control about half the legislature, are reluctant to see Mr Chen gain credit for any achievements. The resulting stalemate leaves businessmen frustrated. In the meantime the economy continues to plod along at growth of below 4%, sluggish by traditional standards. Progress on financial reform also looks uncertain, despite widespread backing for such measures in principle. But at least relations with mainland China lately have been calm.
For better l China relations. While no major breakthroughs are foreseen in the impasse between Taipei and Beijing, the level of cross-Strait tensions is likely to remain low for at least the coming year. With a new leadership team recently installed in Beijing, the Chinese government is expected to be preoccupied with domestic matters for the near term. In addition, China will undoubtedly wish to await the results of the March 2004 presidential election in Taiwan before taking any new policy initiatives towards the island.
Furthermore, after seeing its attempts to intimidate Taiwan voters backfire in the past two presidential elections, Beijing this time will probably do its best to avoid creating a crisis atmosphere. This shift in diplomatic approach is made more likely by the joint campaign between Lien Chan, head of the Kuomintang (KMT, or Nationalist Party), and James Soong of the People First Party (PFP). Both parties support, with caveats, the principle of eventual reunification with mainland China. Beijing may feel that it can better influence the outcome of the election by offering a friendlier face, in effect promising the benefits of closer cross-Strait co-operation if Mr Lien (the likely joint presidential candidate) is elected.
For his part, Mr Chen will seek to improve his reelection chances by reassuring the electorate about his ability to manage cross-Strait relations skilfully. Progress towards meeting one of the business community's main goals the opening of direct transportation links across the Strait may be slow, but at least fears of conflict between China and Taiwan will not be a major factor in business decision-making.
l IPR protection. After a period of resistance to pressure from other governments (notably the US) and foreign companies for stronger action against intellectual property rights (IPR) violations, the government recently has moved to tighten its laws and enforcement. A new Copyright Law expected to be enacted this session would increase penalties against infringement but most importantly it would make such offences a public crime. In the past, police and prosecutors had to wait for victims to lodge complaints before taking action. The interior ministry has also changed internal police procedures to give officers more incentive to conduct raids. But these steps still leave one nagging problem: the practice of many judges of letting IPR offenders off with lenient sentences.
For worse l Political stalemate. The approach of the presidential election in March 2004 is exacerbating the already acrid atmosphere in the Legislative Yuan (parliament), where the voting strength of the opposition is roughly equal to that of the ruling Democratic Progressive Party (DPP) and its allies.
With the two sides at constant loggerheads, passage of necessary economic legislation is often stymied. Examples of bills that have suffered delays are government proposals for increased public construction projects and job creation, measures that the opposition fears will be used for partisan political purposes. Even within the executive branch, officials are likely to have less time to concentrate on policy as the election nears.
l Financial reform? The government's postponement last autumn of reorganisation of the troubled credit departments of farmers and fishermen's associations has raised concern over the pace of financial- sector reform. Officials express optimism about being able to meet the goals of their 2-5-8 plan: reducing banks NPL ratios to below 5% and increasing their capital-adequacy ratios to above 8% within two years. But achieving those goals will require raising the capitalisation of the Financial Reconstruction Fund from the original NT$140bn (US$4bn) to some NT$900bn and the legislature has not yet acted to approve that change.
l Economic malaise. Although economic growth is projected to reach 3.7% this year slightly better than the 3.5% achieved in 2002 and a huge improvement over the negative 2.2% of 2001 that level of economic activity still strikes most Taiwanese as sluggish. As recently as 2000 the economy grew by 5.9%, a performance that at the time was considered unimpressive.
Unemployment remains at an uncomfortable level of just over 5%, and people's sense of their economic well-being is also affected by the tendency to compare Taiwan's situation unfavourably with that of coastal China. Although the impact of the Severe Acute Respiratory Syndrome (SARS) outbreak has not hit Taiwan as hard as some other countries in the region, it is yet another factor contributing to the still mediocre levels of consumer confidence and anaemic retail sales. l Global weaknesses.
With exports accounting for more than 45% of GDP, Taiwan relies substantially on foreign trade to drive the economy. Currently the global markets for Taiwan's exports are beset with uncertainties. Recovery has stalled in the US, which takes about one-quarter of Taiwan's exports. China and Hong Kong, which together account for roughly another quarter of overall exports, are facing serious new challenges due to the SARS epidemic and its impact on travel. Japan, also a major market, continues in its stagnation. As a consequence, the trade engine that was expected to instil some economic momentum this year has been left to operate on reduced horsepower.

Business Asia April

Greater China

A very bad dose of flu construction or being planned, will help keep people moving as the local population continues to expand. River port facilities tying Hong Kong even more strongly into the Pearl River Delta are also steadily being upgraded, both for passengers and cargo.
Throw in a continued push by Hong Kong.s airport to maintain its status as south China.s air-freight hub, and companies have little to fear about Hong Kong.s transport and other infrastructure being anything but excellent. For worse l Service economy to falter.
Hong Kong's broader economy runs principally on services: tourism accounts for around 10% of GDP (if visitor spending in hotels and restaurants is included), and the wholesale and retail trades for around 4%. Services as a whole account for around 86% of GDP. SARS will hit tourism and retailing badly, regardless of how long the disease poses a health threat. Even after its spread is controlled, travellers are likely to remain extremely wary for several months. Our forecast of 0.3% real GDP growth this year is based on the optimistic assumption that SARS will be contained by the public health authorities in the coming weeks.
If the outbreak drags on for much longer, the impact could be even more severe. Other sectors will also be directly or indirectly affected. The financial, insurance, property and business services industries have taken steps to mitigate the impact of the disease, but many such measures will affect both business and the economy. Bans on staff travel, for example, will reduce future business as well as hitting airlines.
l Continuing weak leadership. The administration of the chief executive, Tung Chee-hwa, shows no sign of being able to establish clear policy initiatives, and continues to cave in to pressures from powerful business lobbies. In the latest example, recommendations that various responsibilities for the regulation of listed companies be removed from the profit-making stock exchange and placed with the market regulator were promptly shelved for further consultation by Mr Tung after an outcry from the stock exchange. The outcome is that general uncertainty over the direction of government, especially in the areas of tax policy, is likely to continue.
l Crisis of confidence. The low popularity of Mr Tung and some of his key officials is becoming a problem. The government is widely seen as out of touch, and the political inexperience of officials is beginning to show (as was the case in the recent Lexus-gate scandal, in which the financial secretary, Antony Leung, failed to reveal that he had bought a new luxury car shortly before introducing a sharp hike in vehicle first-registration taxes in his 2003/04 budget). The new accountability system of appointed officials introduced in 2002 with the aim of bringing greater administrative responsiveness appears to have made senior officials more accountable to no one except Mr Tung. The administration is developing a reputation for stumbling from one crisis to the next.
l Uncertain future role. Hong Kong's lack of confidence in its ability to negotiate the next few years will worsen as a result of SARS, but this merely underlines continuing anxiety over the territory's long-term prospects. This is fuelled in particular by concerns that Hong Kong's status as a logistics and financial services hub for China may be eclipsed.
Since Hong Kong's return to Chinese sovereignty in 1997, it has endured two recessions while China has continued to boom; this had led to growing questions as to where Hong Kong's future lies, especially as improvements in south China's ports and infrastructure threaten the role of its harbour and Shanghai 's financial clout continues to grow. Although such fears are overblown nowhere in China is close to rivalling Hong Kong's international services skills, and Shanghai will not emerge as an international financial rival at least within this decade the pervasiveness of such fears may undermine external confidence in Hong Kong.