Taiwan’s 10-year bond yields at 1.28 percent are lower than any of the 47 major sovereign issuers except Switzerland’s 0.80 percent and Japan’s 0.95 percent. The Taiwan dollar strengthened 1.4 percent in the past three months against the greenback as investors favored economies with the strongest finances during the European crisis. The island’s debt is 33 percent of gross domestic product, half the ratio of the U.S., and its $386 billion foreign reserves are the fifth largest.
Financial assets have rallied in the island before the Jan. 14 contest between President Ma Ying-jeou of the Kuomintang Party, who has championed closer ties with China, and Tsai Ing- wen, chairwoman of the opposition Democratic Progressive Party. While Tsai said in a November interview that the island should avoid becoming too dependent on China’s economy, she said her party is now more focused on domestic issues than sovereignty questions.
“Whoever wins, I don’t think there will be a radical change in policy,” Rajeev De Mello, the Singapore-based head of Asian fixed income at Schroder Investment Management Ltd. who oversees $6.5 billion and holds Taiwanese 10-year bonds, said in a Jan 12 interview. “The performance of Taiwan over the last couple of years has been good, so, I don’t see a change whether the opposition or President Ma wins.”
China regards Taiwan, ruled separately since the end of a civil war in 1949, as its own territory and was enraged when the DPP’s Chen Shui-bian pushed for recognition as a sovereign nation during his presidency that ended in 2008. Relations have thawed since Ma took office in 2008 and the two sides have signed agreements on investment and travel.
Yields Decline
The yield on the 1.25 percent notes due September 2021 closed at a two-week low yesterday, prices from Gretai Securities Market show. The yield advantage over similar- maturity U.S. debt has narrowed to 64 basis points from as high as 255 basis points in April, 2010, bolstering appetite from investors, said De Mello. Rules limit investment in debt and money-market products to 30 percent of foreign investors’ Taiwan holdings.
Ten-year yields could test 1.2 percent by March 31 as Europe’s debt crisis hurts Taiwan’s overseas sales, said Albert Lee, a fixed-income trader at Cathay United Bank Co (2826).
Exports rose 0.6 percent from a year earlier in December, the slowest pace in 26 months, the Finance Ministry reported on Jan. 9. The central bank left its benchmark rate unchanged at 1.875 percent for a second straight quarterly meeting last month. The government cut its 2011 economic expansion forecast to 4.5 percent and said growth will slow to 4.2 percent this year.
Ma Leading
“Whoever wins, there won’t be a U-turn in the policy towards China because Taiwan’s economy is dependent on the mainland and they can’t afford to be backtracking on it,” said Rees Kam, a Hong Kong-based senior strategist at SJS Markets Ltd. “The Taiwanese dollar is considered a low-risk currency in the region.”
Taiwan’s dollar reached the strongest level since Nov. 1 yesterday and ended little changed at NT$30.002. The Taiex index index of shares was steady at 7,186.58, bringing its advance this year to 1.6 percent. Foreign investors poured $594 million into the stock market this week on the prospect Ma will win.
Repatriation of Funds
“Investors are confident that things with China will still be the same after the election,” said Samson Tu, who helps oversee $1.6 billion of fixed-income securities as a fund manager at Uni-President Assets Management Corp. in Taipei. “I don’t think Tsai will unwind the efforts Ma has undertaken to improve relations with China.”
Taiwan, an island with a population of 23 million, has been flooded with cash since the collapse of Lehman Brothers Holdings Inc. in September 2008 as companies sent money home to avoid losses in overseas markets, Tu said. M2 money supply has surged 17 percent during that period and the overnight money-market rate, which measures interbank funding availability, has slumped 165 basis points, or 1.65 percentage point.
An opposition win would mean slower economic growth and less appetite for the island’s assets among foreign investors, said Tim Condon, head of Asia research at ING Groep NV in Singapore. Global funds pumped $9.6 billion into Taiwan’s stocks in 2010 on speculation closer ties with China will boost the island’s economy, which grew 10.7 percent. They sold $9.1 billion more local shares than they bought last year.
Political Risk
Financial markets slumped after DPP’s Chen won the presidencies in 2000 and 2004. The Taiex index fell 9.4 percent in the two days following his second victory, after he was shot while campaigning in his hometown of Tainan. The government bought stocks and the currency to stem losses.
A government-backed stock stabilization fund also supported the market in March 1996 when China test-fired missiles within about 30 miles of Taiwan’s two biggest ports in an attempt to intimidate people to vote against former President Lee Teng-hui, who published a state-to-state relations doctrine that led China to brand him “a rat.”
The local stock index has tracked the performance of the MSCI Asia-Pacific Index (MXAP) of equities under Ma, whereas it lagged behind under Chen’s rule. Since Ma took office in 2008, the Taiwanese gauge is down about 24 percent, against the 26 percent drop for the MSCI measure. Under Chen, the Taiex was up 1.9 percent, while the regional index climbed 35 percent.
DPP Risk
“It’s a risk if the DPP wins,” said Condon. “It’s not investment-friendly. Taiwan’s economy is one of the few economies in the world where economic growth has increased after the global financial crisis and the reason for that is China.”
China passed the U.S. as Taiwan’s largest trading partner in 2002. Two-way trade reached $160 billion last year, according to Chinese customs statistics, a 10 percent increase from a year earlier. Under the first trade accord signed by the two sides in 2010, China agreed to open markets in 11 service sectors such as banking and to cut duties on Taiwanese imports worth $13.8 billion in 2009, or about 16 percent of the total.
Tsai said in an interview in November the pact will need “constant review” and any changes will follow the “democratic process.” Tsai rallied more than 100,000 people to oppose the accord in 2009, which Ma’s administration said will help create more than 260,000 jobs.
Warming Ties
In the first 11 months of last year, Taiwan’s investment in the mainland rose to $12.4 billion, from $10.2 billion a year earlier, government data show. Visitors from mainland China rose 6 percent to 1.6 million in the period.
Ma was widening his narrow lead over Tsai in public opinion polls taken prior to a blackout period for voter surveys that began on Jan. 4. Taiwanese law bars publication or release of polls 10 days prior to presidential elections.
“We’ll probably see a knee-jerk rally for the Taiwan dollar if Ma wins because that means China-Taiwan relations will continue to develop,” said Sacha Tihanyi, a Hong Kong-based strategist at Scotia Capital, the investment banking unit of Bank of Nova Scotia, Canada’s third-largest lender. “If the opposition sticks to the script that they’ll maintain the status quo, it’s a confidence builder.”
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