Global Crisis Hits Greater China:

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Global Crisis Hits Greater China China
Adjusts, while Taiwan Looks for Opportunities
Nov 19 2008 Xu Sitao Chief Representative
China The Economist Group Director, Advisory
Services, China Economist Intelligence
Unit stevenxu_at_economist.com
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Agenda

• Global crisis forces China to adjust
• China has many tools and a financial war-chest,
  but also many goals
• Policy adjustments will impact medium-term
• Long-term growth trajectory towards
  domestic-demand led economy remains intact
• Chinas adjustment process will open up
  Opportunities for Taiwan

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Global Crisis Complicates Chinas Economic
Development

• The economy faces a synchronized recession in the
  West
• Economic open-ness accentuates the impact of
  international demand slowdown
• China must shift to a different growth model to
  achieve sustainable growth
• China is caught between mounting domestic needs
  and rising international demand

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Chinas Moving Targets

• 8 months ago inflation fighting
• 4 months ago inflation fighting and economic
  growth promotion
• Today maintain social stability, economic
  stability, and financial stability
• RMB depreciation could become a counter-cyclical
  tool

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Stock Market Turmoil Frequent Fluctuation Need
Not Be Catastrophic

• Large fluctuations in Chinas stock market are
  not unusual
• Linkage between asset markets and real economy is
  weak

Source CEIC
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Ample Room for Rate Cut
Food prices
or excess liquidity?
Source CEIC
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China is already transitioning to
domestic-demand-led growth
Medium term objective
Source CEIC
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China a consumption boom may still be likely

• In the 1980s rising prices dented confidence and
  altered peoples spending habits.
• Today, inflation has a completely different
  impact

• Rising income and greater flexibility have made
  the middle class more able to sustain rising
  prices for food and consumer goods

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RMBs Quasi-peg to the Greenback Provides Policy
Leeway

• Combination of falling oil prices and dollars
  resurgence makes inflation-fighting simple
• This combination presents a rare opportunity for
  China to adjust energy price (provided fiscal
  tools are implemented)

Source CEIC
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A Tax Cut is Feasible and Desirable
Source CEIC
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Taiwans economic outlook - Irritating, but not
fatal

• Inflation scare proved to be transitory
• Limited tools to cushion the shock
• TWD likely to be used as the main lever in
  reflation

Source IMF, international Financial Statistics
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Taiwan has no financing shortfall
Source CEIC
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Taiwans Policy Responses

• Rate cuts
• Fiscal stimulus
• Exchange adjustment
• Limited choices for small-open economies

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Taiwans Increasing Reliance on Mainlands Demand
Source CEIC Central Bank of China (Taiwan)
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Conclusions

• China has many policy tools but also has many
  goals
• Taiwan limited scope in undertaking
  counter-cyclical measures
• Opportunities for Taiwan in Chinas transition to
  domestic-led growth
• Opportunities for Taiwan in Chinese firms
  investment abroad