Taiwan: Bring It On

Taiwan’s new president and its banks face a tough market and a changing economic picture. They’re ready.

Taiwan’s president-elect Tsai Ing-wen swept into power along with the independence-leaning Democratic Progressive Party after an historic vote on January 16. Increasingly, it seems she has her work cut out for her.

Taiwan’s president-elect, Tsai Ing-wen, campaigning in New Taipei City in December.

Her victory had been predicted, but the rebuff of president Ma Ying-jeou and the Kuomintang—which had favored conciliation and collaboration with Beijing—was stronger than expected. President Ma made an historic move when he met with China’s president, Xi Jinping, in November—the first meeting of the presidents of the respective nations since Chiang Kai-shek fled China and established his regime in Taiwan in 1949. But the move did not impress voters, who two months later gave the DPP control of the legislature as well as the presidency in a landslide.

Tsai has said that she intends to keep relations with China on a “status quo” basis. For its part, China, which does not recognize Taiwan’s independence, seems to be watching, but has so far remained nonconfrontational. China’s foreign minister, Wang Yi,
former head of the mainland’s liaison office with Taiwan, somewhat obliquely said following the election, “We do not care that much who is in power in the Taiwan region of China.”

How far cross-Strait politics played into the defeat of the Kuomintang is uncertain. The president-elect is not expected to make a radical departure from KMT policies. “We don’t think that Tsai Ing-wen’s victory in the recent election will make much of a difference to the economy,” says Daniel Martin, senior Asia economist at Capital Economics in London. “Given the new president’s emphasis on fiscal restraint during the campaign, a surge of government spending seems unlikely when she takes over in May.”

A slice of PT Bank Pan Indonesia will enhance Fubon’s regional strength.

Vivian Hsu, Fubon Financial

In fact, Tsai, 59, ran a campaign that emphasized fiscal discipline—according to recent news reports, she likes to compare herself to Angela Merkel and has a reputation for economic policy rather than political maneuvering. She earned a law degree from National Taiwan University, a master’s degree in law at Cornell University in New York, and a doctorate in law at the London School of Economics. She joined the government in the 1990s, working as a senior trade negotiator for Taiwan’s entry to the World Trade Organization. She was a national security adviser to president Lee Teng-hui in the 1990s.

She plans to pursue measures to nurture growth drivers in the economy, including biotech and medicine, green tech, entrepreneurship, smart machines and defense and aerospace, according to a campaign policy statement. Tsai has also touted her new administration’s plan to set up a national investment fund, similar to Singapore’s Temasek Holdings, to provide investment funding that will also draw private-sector funding, such as private equity, leading to eventual listings.

Although her platform includes an emphasis on sustaining trade talks with China, she plans to diversify trade options by gaining Taiwan’s inclusion in the Trans-Pacific Partnership, for example, and pushing a “new southbound policy” of strengthening trade ties with the Association of Southeast Asia nations (Asean) and India, according to the Taipei Times.

She brings this sturdy but modest economic growth program to Taiwan at a time when the nation has endured a string of bad economic news. Taiwan’s exports declined for the twelfth successive month in January, putting a strain on Taiwan’s vital tech sector. The decline was steep, with January exports falling 13%, to $22.2 billion, from the same month a year before, according to government data. Exports fell 12% in December.

How long will the bad news last? Andrew Tsai, economist with KGI Securities Investment Advisory, says he expects “exports to remain in the red for the first half of the year.” He noted that two factors are playing into the export decline. China’s economy grew at its slowest rate in 25 years in 2015, at 6.9%, compared with 7.3% in 2014, according to Chinese government figures. The decline is expected to continue this year. Furthermore, he says, China is looking increasingly to support its own component manufacturers, rather than import components from Taiwan.

In February, DBS, the Singapore-based bank, lowered Taiwan’s 2016 growth forecast from 2.4% to 1.8%, and signaled that continued strain on the economy would prompt Taiwan’s Central Bank of the Republic of China to follow December’s surprise rate cut with another as early as the first quarter. “Further easing is needed to encourage financing and investment activities and to provide more impetus for the real economy,” DBS analysts reported. “A rate cut at the next central bank meeting in March appears to be a done deal.”

Capital Economics’s Martin concurs. He also sees some bright spots. Exports are equivalent to 70% of GDP in Taiwan, so a sustained recovery, he says “is unlikely without some improvement in export performance.” However, the economist is more bullish on China than many, expecting growth there to pick up in response to policy easing. “At the very least, Chinese demand, which accounts for a third of Taiwan’s exports, should not create the same drag on Taiwan’s exports as it did in the earlier part of 2015,” he says.

Daniel Martin, Capital Economics: New leadership in Taiwan won’t be opening the cash spigot.

He notes that Taiwan emerged from recession in the fourth quarter of 2015, something that the negative export figures tend to obscure. In fact, the economy grew by a seasonally adjusted 0.8% in the fourth quarter, compared with the third, breaking a pattern of two consecutive quarters of contraction. One reason is a revival in domestic demand, with private consumption growing 1.6% in the final 2015 quarter, year-on-year. Martin is so sanguine that he breaks ranks with most analysts, and even with Taiwan’s government, and expects about 3% growth for 2016.

Taiwan’s economy is also indisputably linked to rich economies in North America and Europe, which raises other concerns. “Consider how three of the top five [companies by] market cap of Taiwan—TSMC, Hon Hai/Foxconn Technology Group and Chunghwa Telecom—are all three related to Apple,” says Jack Wang, division head of global treasury sales for CTBC Bank in Taiwan. “And here you have Tim [Cook], Apple’s chief executive, saying that he is having trouble sleeping due to declining iPhone sales.”

Indeed, Apple-worry is everywhere. Hon Hai/Foxconn Technology Group—is the biggest producer of iPhones. With global sales of iPhones expected to peak, Foxconn has been searching to diversify. This was partly behind the company’s bid for ailing Japanese electronics manufacturer Sharp—a colorful deal that had yet to see resolution as of press time. On February 25, Sharp’s board approved the almost $6 billion sale, but Foxconn backed away, saying that at the last minute Sharp had disclosed worrisome liabilities. Negotiations dragged on into March, when Sharp’s two biggest lenders offered to lower interest rates on billions of dollars in loans to facilitate the deal, according to the Wall Street Journal.

Suppose the deal goes through. What value can Foxconn, with its single-minded original-equipment-manufacture mentality, add to the merger? Sharp disclosed that Foxconn had agreed to invest in multiple areas of its business, including the screen segment and new products based on the Internet of Things, as well as Cloud-based services for its consumer products. Analysts have been skeptical that Foxconn’s chief executive, Terry Gou, can deliver value out of this pairing of companies, which is short on potential synergies, and whether Taiwanese entrepreneurizalism will meld with Sharp’s traditional Japanese corporate culture.

But suppose Foxconn completes the deal and manages to build on Sharp’s potential. It will have achieved a remarkable feat—and could serve as a model for other Taiwanese businesses looking to diversify away from Taiwan’s traditional OEM approach and reliance on China.

Joseph Jao, Taishin Financial: Diversifying geographically is critical for Taiwan’s banks.

In this sense, Taiwan’s banks have even more of an incentive to look beyond the nation’s borders for growth than its legacy tech manufacturers. Taishin Financial Holding, for example, has been pursuing opportunities in Vietnam and other Asean nations. “As banks, we need to survive in this congested environment. Going overseas will be very important to us,” Joseph Jao, Taishin’s president, told Global Finance.

Perhaps the most interesting recent example of M&A activity looking beyond Taiwan’s borders is a potential partnership of Fubon Financial Holdings with Spain’s BBVA to buy ANZ’s $614 million stake in PT Bank Pan Indonesia. The proposed deal, first reported in September last year, could face opposition from PT Bank Pan Indonesia’s controlling shareholders, the Gunawan family. Even so, its emergence implies that Taiwan’s banks are joining the ranks of global players like BBVA in hunting for overseas assets. Fubon’s president Vivian Hsu frequently emphasizes the bank’s strong commitment to a regional footprint. “Fubon is the only Taiwanese financial institution with banking subsidiaries in Taiwan, Hong Kong and China,” Hsu told Global Finance. “The unique position brings our banking operation a higher franchise value than peers’.”

Taiwan is hardly a stranger to change or confrontation. Perhaps its public battles—exemplified by its raucous parliament—is one secret to its success. At the Global Finance roundtable in Taipei on January 28, the chief risk officer of E.Sun Bank, Oliver Hsieh, said, “People living in Taiwan are actually not afraid of how the global market is going to change.” He also argued that “Every kind or risk makes [E.Sun Bank] stronger.”

What’s true for the banks is true for the nation. Expect Taiwan to manage this season’s set of risks with its usual adaptability and verve. n

GFmag.com Data Summary: Taiwan

Central Bank: central bank of the Republic Of China (Taiwan)

International Reserves

$426 billion

Gross Domestic Product (GDP)

$530 billion*

Real GDP Growth




GDP Per Capita—Current Prices


GDP—Composition By Sector*








Public Debt (general government
gross debt as a % of GDP)




Government Bond Ratings
(foreign currency)

Standard & Poor’s


Moody’s Outlook

FDI Inflows

$3,207 million

$3,598 million

$2,839 million

* Estimates
Source: GFMag.com Country Economic Reports, CBC