China’s rattling of sabers may be causing tension in Taiwan, but the country’s currency is on the rise.

Author: Tom Leander

In a recent video, Chinese commandos are shown edging along a wall, probing the air in front of them with automatic rifles. They turn a corner. There stands a rectangular pile of debris. A red tower rises from the middle of the rubble.

The scene would seem fairly innocuous except for one small detail: The smashed building looks a whole lot like Taiwan’s presidential office. While a Chinese government spokesman denied the video was a veiled threat aimed at Taiwan, the mock assault by the People’s Liberation Army sent shock waves across the Strait.

That’s not surprising. Almost everything relating to the mainland causes an uproar in Taiwan these days. Standing president Ma Ying-jeou favors closer ties with China, a stance that has made him deeply unpopular with many voters. The Kuomintang Party (KMT), which Ma headed until last year, will be challenged by the Democratic Progressive Party (DPP) in January elections in which Tsai Ing-wen will go up against Hung Hsiu-chu, the man tapped by the KMT as its next presidential candidate in July.

Since the DPP favors a less-accommodating relationship with China, some analysts speculate that the assault video was a return to the militaristic messaging that China indulged in the last time the DPP was in power eight years ago. Such rhetoric has been notably quiet during Ma’s tenure.

A number of polls strongly suggest that the DPP and Tsai will carry the vote, generally considered to be a referendum on the Ma administration’s push for greater cooperation with China. Taiwan independence is a passionate issue with younger voters, who are predicted to favor the DPP. Hundreds of students stormed the Ministry of Education headquarters in Taipei in late July to protest revisions to a widely used history textbook. The protesters, who were eventually rebuffed, demanded that the book be withdrawn and unbowdlerized. They claimed the newly edited version misrepresents Taiwan’s sovereignty and instead pushes a “one China” view of history.

The slowdown in China’s economy in the past months—and the subsequent collapse of the A-share market on the Shanghai exchange—has added to the tension. Most of Taiwan’s major businesses and, increasingly, its biggest banks see cross-Strait business as an important source of revenues.

Vivian Hsu, president and chief executive of Fubon Financial, notes that China is in a transitional phase, in which high-speed growth will be replaced by a more sustainable trajectory. “In Taiwan, we went through a similar economic transition,” she says. “As Fubon has operated in the financial industry in Taiwan for over fifty years, we aim to leverage our experience to seize the growth opportunity in China.”

But given the volatility on the mainland over the past months, it will take time before that strategy takes hold. In the meantime, China’s slowdown is putting a substantial dent in Taiwan’s economic output. Gross domestic product in the second quarter grew a mere 0.6% from a year earlier, much weaker than analysts had forecast. Underlying the figure was a 0.9% drop in exports, year-over-year. The dip was mostly owing to lower demand from China, along with the slowing of the US recovery.

In the wake of those developments, Barclays in August lowered its forecast for Taiwan’s economic growth in 2015 to 2%—a substantial drop from its earlier 3.7% prediction. The UK bank also revised its previous GDP estimate for 2016 to 3.3%, down from 4%.

Still, some observers believe Taiwan’s economy has bottomed out. “There are reasons to think the second quarter will prove to be the low point,” London-based Capital Economics’ Taiwan specialist, Gareth Leather, says. “Exports should start to benefit from an improvement in global demand. A better export performance should also help boost industrial production and investment spending, both of which are strongly linked to demand for exports.” He adds that the recent drop in energy prices has fattened people’s wages in real terms, which should sustain higher levels of consumer spending.

One wild card: the strengthening of the New Taiwan dollar against the US greenback. The local currency has appreciated 2.5% against the US dollar since the beginning of 2015—the only world currency to have gained against the dollar this year. Impressive, yes, but the rising New Taiwan dollar puts the country’s manufacturers at a disadvantage to manufacturers in Japan and South Korea, where the yen and the won remain weak.

This imbalance has made bankers and industrialists in Taiwan look forward to a possible interest rate hike by the US Federal Reserve. If the Fed finally makes its move, the US dollar is likely to strengthen against the New Taiwan dollar, helping to reinvigorate the country’s exports. “The strong (US) dollar would be positive to Taiwan’s economy,” says Fubon’s Hsu. “This is due to the contribution from export activities, which account for over 60% of Taiwan’s GDP.”

Hsu sees an upside beyond the boost to exports. “The New Taiwan dollar has depreciated less than the Japanese yen and Korean won during the dollar rise recently, which shows a relatively stable exchange rate and more stable monetary policy outlook in Taiwan,” she notes. “It would attract foreign investors and fund flows coming into the Taiwan market.”

Indeed, Taiwan’s relative stability cannot be ignored when addressing its economic prospects. That stability, even in such a fractious season, can be seen on the political stage. Taiwan is having its family argument with China out in the open.

It is also jealously guarding its economic and political independence. Case in point: In early July, Taiwan’s Ministry of Finance reversed course, deciding not to apply for membership in the China-led Asian Infrastructure Investment Bank. Many Western nations have eagerly joined the AIIB, which is effectively China’s answer to the US-dominated World Bank. But officials in Taiwan’s Finance Ministry feared the nation’s sovereignty might be compromised if the country joined the new multilateral financing organization.

China initially indicated it would accept Taiwan. But authorities in Beijing reportedly changed the rules for admission for those members “who do not enjoy national sovereignty or cannot take responsibility for the conduct of their international relations.”

The statement was an obvious reference to Taiwan, which China does not recognize as a nation. Taiwan’s refusal to accept this rhetorical trope by its powerful neighbor, however, reveals a confidence in the country’s ability to sustain a robust economy. It has done so before—even amid mock military maneuvers and a loud rattling of sabers. Data Summary: Taiwan

Central Bank: Central Bank of the Republic of China (Taiwan)

International Reserves                 


Gross Domestic Product (GDP)

$529.550 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

$-1,957 million

$3,207 million

$3,688 million

* Estimates                                                                            
Source: Country Economic Reports



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