Structural Change in China Hampers Taiwan's Exports: Central Bank

According to a report recently released by Taiwan's central bank, the global economy is expected to continue improving but may be influenced by the withdrawal of the U.S. quantitative easing (QE) policy, the risk of shadow banking in China, and economic risks caused by geopolitics in such areas as the Middle East and Ukraine.

The central bank says that the slowdown of Taiwan's export growth is due mainly to global business sluggishness and slow economic growth in China, and especially due to the changes in China's economic structure in recent years that have boosted the domestic content rate and expanded local production capacity, resulting in decreased imports from Taiwan.

F.N. Perng, governor of the central bank, points out that the annual growth of Taiwan's exports to China averaged 18.4% before the global financial crisis that broke out in the second half of 2008 but plummeted to 2% after that. For LCD panels, the annual growth of exports to China nosedived from 62% to a negative 3.8%.

Global Insight, world's leading forecasting organization, predicts that China's economic growth this year will  be 7.5%, a little lower than the earlier prediction. Perng notes that China is now the world's second largest economy and that The Economist forecasts that its economic scale, based on real GDP, will likely exceed that of the U.S. in 2019.

Perng further points out that the tense situation in the world's financial market gradually eased in the second half of last year as the major economies adopted easy monetary policies and financial conditions in the euro zone improved. Yet risks in the global financial market seem to be growing this year as capital costs remain high in the euro zone and the quality of assets is deteriorating.

He predicts that the position of China's currency, the renminbi (RMB), or yuan, will very likely outstrip that of the Japanese yen and the British pound within three years and will equal the U.S. dollar as the world's major reserve currency in 2020 at the earliest. So far, three central banks of about 40 countries include the RMB in their assets.

Financial experts emphasize that if China wants to promote the RMB as a major global reserve currency, it should further open its financial market, relax limits on the flow of capital, and stabilize commodity prices, in addition to reinforcing both political and military strength.

Taiwan's central bank is paying close attention to the increasing influence of the RMB in the international market, and will likely upgrade the ratio of RMB in its pool of foreign exchange reserves. Moreover, the bank is anxious to promote Taiwan as an offshore RMB center despite rising pressure from strong rivals such as Hong Kong and Singapore. (JL)