20 November 2018
President Tsai Ing-wen has been accused of failing to offer anything concrete to revitalize the sagging economy. Photo: Reuters
President Tsai Ing-wen has been accused of failing to offer anything concrete to revitalize the sagging economy. Photo: Reuters

Why Taiwan stock market may not sustain rally

Cross-strait relations have been on a tightrope since Taiwan’s President Tsai Ing-wen took office two months ago, but the island’s stock market has been the best performer in Asia during the period.

The Taiwan Stock Exchange Weighted Index has jumped 11.5 percent over last the two months since Tsai took the helm on May 20, reversing the decline in the first half of this year and far outperforming its regional peers, such as those in Japan (-2.9 percent), South Korea (2.5 percent), China (6.2 percent), India (9.3 percent) and Hong Kong (9.9 percent).

Bloomberg said the island’s equity market attracted US$5.4 billion capital in July, the highest record for a single month. The number also exceeded the US$3.3 billion inflow for the entire 2015.

The Taiwan market has suffered a slump in the run-up to Tsai’s election victory in January, and so the current rally could be interpreted as a bounce back after the market had priced in its potential negative impact on cross-strait relationships and the local economy.

Beijing has stepped up its pressure on Tsai and threatened to suspend regular talks with Taipei. The number of mainland tourists visiting Taiwan has also dropped.

Another key factor behind Taiwan’s stock rally is the so-called iPhone 7 effect.

The highly anticipated release of the new iPhone model has boosted shares of a number of Apple suppliers listed in Taiwan, including Taiwan Semiconductor Manufacturing Corp. (TSMC), Hon Hai Precision Industry, Pegatron and Catcher Technology.

These stocks have been sought-after and attracted huge capital inflow in the past two months. 

For example, TSMC and Hon Hai Precision, which together account for about 22 percent of the TAIEX index, have rallied 19 percent and 17 percent respectively since May.

However, the market rally may not be sustained. Most of these Apple suppliers have moved their factories to the mainland, which means their business gains won’t translate into any meaningful increment of new jobs for the island.

Taiwan’s economy will continue to hollow out as the young generation struggles to move up the social ladder and the wealth gap keeps widening.

In response to the economic challenges, Tsai has proposed a “New Southbound Policy” to move the island away from its overreliance on the China market and to cultivate more business opportunities in South Asian and Southeast Asian countries such as India, Indonesia, Vietnam, the Philippines, Thailand and Malaysia.

However, many doubt if the ambitious plan will work because those countries have already attracted huge overseas investments and Taiwan doesn’t seem to have any unique competitive edge in this regard.

In fact, the former president, Lee Teng-hui, came up with a similar plan back in 1990 but had nothing much to show for it.

Other than repeating this Southbound Policy, Tsai has been criticized for failing to offer anything concrete to revitalize the sagging economy.

This article appeared in the Hong Kong Economic Journal on Aug. 5.

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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