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Millions of US $  406,000    
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 US $ 18,000
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Chen shui-bian

Update No: 015 - (15/04/05)

Different ball game - new rules!
Having failed miserably, over more than a decade, in its efforts to force Taiwan to the negotiating table on the basis of acceptance of the "one China" principle, through threats of military action against what it sees as a renegade province, Beijing under President Hu Jintao, now appears prepared to try another road towards China's eventual goal of reunification. Using classic "United Front" tactics honed during the Long March era, Beijing is now courting Taiwan's opposition leaders as a means of isolating the government of Taiwan. At the end of April, it was Kuomintang (KMT) chair Lien Chan who visited Beijing, while this coming month it will be the turn of his opposition partner and Chair of the People First Party (PFP), James Soong to visit the Middle Kingdom. 

The significance of these two visits cannot be underestimated. They represent a sea-change in China's attitude towards dealing with what it sees as the "Taiwan problem." Suddenly we are in a different ballgame and with new rules. 

At one level it appears that Beijing has acknowledged its mistake in pursuing the anti-secession law to finality. That was a trial balloon that should not have been allowed to fly and has done nothing to improve China's international image as a "peace-loving nation." Indeed it has done much to put fresh weapons - both figuratively and literally - into the hands of those who believe that China needs to be contained. The latest policy initiatives undoubtedly represent a new phase in China's bid to win hearts and minds in Taiwan, but in reality probably nothing much has changed. China's ongoing objective is to isolate President Chen and show him to be an irrelevance.

At least for the moment the tension that was growing in the cross-straits relationship as a result of China's passage of an anti-secession law, appears to be subsiding. But we are now entering previously uncharted waters in the relationship and what happens next is far from uncertain. At least, as someone (probably a non-Chinese) once said "we live in interesting times."

China's charm offensive
The Kuomintang, has always opposed Taiwan independence and has supported its own version of a "one China policy" albeit a one China that is vastly different from what is now the Peoples Republic. Nevertheless, the Chinese Communist Party and the Nationalists, old adversaries as they are, do at least tacitly understand one another. The KMT represents the face of an "older" Taiwan and one that China can more readily come to terms with.

Mr. Lien is the most senior KMT official to visit China since the KMT fled to Taiwan in 1949 at the end of the Chinese Civil war. It will be recalled that the Chinese Communist Party and the KMT were the two protagonists in the civil war that saw the defeated armies of defeated armies of Generalissimo Chiang Kai-shek flee to Taiwan. As such, the visit has a historical as well as political significance, albeit a significance somewhat diminished by the fact that the KMT is no longer the party in power on Taiwan but only the major party in the opposition coalition.

The message appears clear and simple: having seriously antagonised voters in democratic Taiwan by naked threats of force in two earlier presidential elections - by firing missiles towards the island in 1995 during the election period and by shrill attempts at predicting dire consequences of voting in the independence-minded Chen Shui-bian in 2000 - Beijing believes it can do better by mending fences with the opposition, superficially at least. 

By feting Taiwanese opposition politicians, China is sending a message to the people of Taiwan that their present government is impotent and that Beijing will deal with the KMT, since it has never renounced the one-China principle (although in reality, its position is not that much different from that of the governing Democratic Progressive Party (DPP)).

Mr. Lien is due to step down later this year from the chairmanship of his party but it appears that before he does so, he wishes to leave a historic legacy and point his party in a direction from which his successor cannot easily backtrack. With a successful visit behind him, he evidently believes that history will treat him more kindly. Indeed already there is fresh talk that he may be drafted to serve a third term as Taiwan's KMT Chair which would allow him to stand against President Chen Shui-bian once more when the country next goes to the polls in 2008. Perhaps that was even part of the original game plan. If so, it only proves that the KMT has its future firmly rooted in the past.

Following the feting of Mr. Lien by President Hu Jintao and others in the Beijing leadership, President Bush telephoned the Chinese president to remind him that if China was truly interested in pursuing an outbreak of peace across the Taiwan Straits, it should really be talking with President Chen Shui-bian. For so long, it has appeared that Washington has been more concerned to ensure that Taiwan's leadership did not upset the present uneasy status quo and the American action was greeted in government circles in Taipei as though Washington had finally woken up to the new reality. As one newspaper in Taipei commented: Washington's position is vexatious since, while it has busily been castigating President Chen for this stand against Beijing it is clearly in American's strategic interest to ensure that reunification never takes place. Mr. Bush need not worry on that score.

At the end of the day it will take more than a couple of pandas…
The government in Taipei has been less than enthusiastic about China's latest overtures to the island and probably with good reason. China's offer to expand trade links and to allow mainland Chinese tourists to include Taiwan in their travel plans (not to mention the promise of a pair of giant pandas) has been widely interpreted by Taipei and elsewhere as an attempt by Beijiing to bolster the credibility of Taiwan's opposition parties at the expense of the ruling Democratic Progressive Party and especially President Chen Shui-bian. China fears that the DPP continues to pursue an agenda that will eventually lead the island to seek full de jure independence from Beijing. The latest opinion polls suggest that attitudes on Taiwan towards China remain unchanged. Nevertheless Mr. Chen will be forced to rethink his position and to regain the initiative. He is a consummate politician who will no doubt rise to the challenge.

The Economy
Strong growth in export orders masks a slowing economy
Taiwan's export orders rose by 21.22 percent year-on-year in March to $20.9 billion and accelerating from a 7.68 percent growth level recorded in February. Strong global demand as well as demand from China were cited as the main contributors to the sharp rise. Combined export orders for January-February rose by 19.47 percent from a year earlier. 

Orders from China (including Hong Kong) reached $5.07 billion or 24 percent of the total. These orders were up by 29.3 percent from a year earlier. US orders in March accounted for $5.47 billion (26 percent of total and up by 19 percent year-on-year); Japan accounted for $2.28 billion (10.9 percent; 46 percent) and Europe $3.16 billion (15.1 percent; 24 percent). 

By product category, information and communications products totalled $3.55 billion (8.3 percent increase), electronics $4.2 billion (17 percent increase) and transportation equipment $1.04 billion.

In fact, while these orders are booked in Taiwan, much of the actual manufactured output may be in China since Taiwanese companies are increasingly moving their production base to the Chinese mainland. Manufacturing output, the largest component in Taiwan's industrial production index, actually fell by 0.77 percent in March as compared to one year ago, mainly due to the decline of chip production in Taiwan as local foundries have already relocated to China.

Actual exports from Taiwan rose by 6.9 percent in March pasting a record of US$15.78 billion. However imports rose by 1.9 percent to US$16.1 billion resulting in a trade deficit of US$390 million. The trade deficit has been blamed on a slowdown in demand for electronics products, the island's largest export category as well as the high prices of raw materials. Worrisome is the fact that the electronics sector has now registered negative growth for three years in a row. The rising Taiwan dollar is also putting pressure on the export sector and on economic activity generally. The positive March export figures follow a contraction of 10.8 percent in the previous month. China's appetite for steel and petrochemicals has somewhat mitigated against a decline in demand for electronics products by the US market and the local export sector is ineluctably being drawn ever more into dependence on China for its continued growth.

Overall, local economic activity appears to be slowing. The government's composite index of leading indicators fell by 0.4 percent in March following a drop of 1.7 percent in February (both figures month-on-month). According to the Council of Economic Planning and Development, the slide reflects deteriorating conditions in the local manufacturing sector and in the stock market.

A leading Taiwanese think-tank, the Chunghwa Institute of Economic Research has lowered its forecast for economic growth for the current year to 4.05 percent from an earlier projection of 4.37 percent. Among the reasons cited for the lower forecast are a weakening foreign trade sector, slowing global demand and rising prices of oil and other raw materials.

Investment has already slowed
Rising cross-straits tensions in the run up to - and aftermath - of Beijing's passage of the anti-secession law have taken their toll on the investment climate during the first quarter of the year. According to data released by the Taiwan's Ministry of Economic Affairs, Taiwanese government-approved investment in mainland China fell by 6.57 percent year-on-year (y-o-y) to US$1.27billion, while the number of approved projects dropped by 47.83 percent y-o-y to 289. By contrast, Taiwanese investment in the People's Republic rose by 21.6 percent y-o-y to US$2.15bn in Q404. At the same time, foreign investment in Taiwan plunged by 38.1 percent y-o-y to US$475.9 million in Q105. It remains to be seen whether, with the heat now dissipating in the relationship with China, investment figures will improve in the remainder of the year.

Taiwan: Jobless rate increases
Latest government figures show that industrial output dropped 12.26 percent year-on-year in February as compared to a 13.32 percent (y-o-y) expansion in January. These numbers suggest that the anticipated economic slowdown may be occurring faster than expected. While it has been put forward by those that wish to put the best possible gloss on the numbers that in part, the drop in output could be attributed to fewer working days around the lunar new year holiday, economists believe that the problem is more systemic and linked to the continued migration of Taiwan's manufacturing capacity to China and elsewhere overseas. Appreciation of the Taiwan dollar is also contributing to the problem as is the recent removal of the garment quota system to the United States on Chinese manufactured items.

As a consequence the jobless rate in Taiwan jumped to 4.28 percent in February, the highest in eighteen months. Officials continue to counsel caution and believe that it will be several months before any clear trend can be seen from the jobless figures. Nevertheless it seems clear that the economy is in for a tougher ride in the months ahead.

CPI Increases in March
Taiwan's Consumer Price Index (CPUI) rose at a higher than anticipated rate of 2.31 percent (year-on-year) in March driven by higher fuel and food prices. Core inflation which excludes food and energy rose by only 1.03 percent suggesting that any further rise in April could be moderated.

Exchange Rates and reserves
The exchange rate of the Taiwan dollar to the US dollar as of end April 2005 stood at 31.2160 (as of 31 March the rate stood at 31.3140). Against the UK Pound the rate was 58.899 (58.926). Against the Euro, the rate stood at 39.958 (40.4410).

Taiwan's foreign exchange reserves amounted to US$252.64 billion at the end of April 2005, showing an increase of US$1,505 million from the figure recorded at the end of March and an increase of US$10,902 million compared to the end of last year.

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