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04 Jun 2013

Taiwan acts as growth slows

Donna Kwok

by Donna Kwok

HSBC Economist, Greater China

Shipping crates

Taiwan plans to sign a trade agreement with China for services

Days after the Taiwan government reduced its GDP forecasts in May, ministers moved to buffer the exports-reliant economy from still-sizeable future challenges in the global trade cycle. Premier Jiang Yi-huah announced plans to unveil new measures to prop up growth that could include tax changes, private infrastructure funding, help for start-ups and subsidies for consumer goods. Taipei also plans to sign a trade agreement with China for services.

The official forecast for Taiwan’s 2013 GDP growth was cut from 3.6 per cent to 2.4 per cent only days earlier. Given that private spending will have to sustain growth in the absence of strong trade flows, the consumption bias of Jiang Yi-huah’s proposals appears well-focused.

Measures under discussion for boosting the economy have included:

  • revising the controversial capital gains tax introduced in January 2013;
  • securing greater private-sector participation in public construction projects, particularly from local insurance funds for infrastructure in general;
  • establishing a NTD1 billion (USD33 million) “Angel Fund” to assist start-ups and entrepreneurs seeking patents;
  • new or extended subsidies for replacing private cars and household appliances;
  • simplifying the tax system to give business and investors greater certainty;
  • incentives and simpler documentation to attract more high-end and business travellers from Hong Kong and mainland China;
  • a trade agreement to give Taiwanese companies access to some of China’s e-commerce, healthcare, transport, finance, telecoms and tourism sectors while Chinese businesses gain access to Taiwan’s finance, healthcare and tourism.

Some of the measures had been in the works for a while, but we think their consumption bias is apt given that, after trade, private spending is the most important driver of the island’s growth. From 2010 to 2012, private consumption underpinned an average of 41 per cent of GDP growth.

Private investment has been important too, contributing 19 per cent of the growth, but much of this has been counterbalanced by a simultaneous contraction of public and government investment. That is presumably why Jiang Yi-huah also mentioned plans to boost the public construction budget.

But how much this mix of measures ultimately boosts the economy will depend on their scale, timing and pace.

The capital gains tax revision should have the biggest near-term impact, in our view. Movements in Taiwan’s stock market have a significant wealth effect on people’s spending. We estimate that for every sustained 10 per cent increase in Taipei’s share index, the nation’s private consumption spending rises by around 0.7 per cent – potentially lifting GDP by up to 0.4 percentage points. Taiwan is the Asian region’s second most sensitive economy to this equity-wealth impact.

This research was first published on 28 May 2013.
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