Asia's Sellout Season
Last weekend your editor attended an Italian opera at the National Theater here in Taiwan. The actors were all petite locals, but that didn’t stop them from belting out arias in a sonorous enough fashion to make the fattest Italian leading lady blush. The audience consisted of well-to-do academic types and business people. Men came in dapper suits and the women wore silks and fine coral jewelry. It was a far cry from what you might expect from a society that, only a few generations ago, was largely agrarian-based.
As the orchestra’s notes filled the plush, cavernous hall, we wondered, “Could this be the new Asia? The Asia of the future?” Those who dream of a great global economic recovery certainly hope so. Now that the American consumer is all but tapped out, they look to Asian producers to fill the demand gap. But one opening night does not make a season, as those in the industry might say.
Taiwan is not all Lucia di Lammermoor’s and lorgnettes, of course. Far from it. Indeed, few places we’ve visited in Asia more abundantly furnish the senses with the rich/poor, old/new dichotomies so prevalent around this region. Just outside the concert hall, for instance, looms a giant bronze statue of Chiang Kai-shek, a stark and foreboding reminder of the not-so-distant past when the tiny South China Sea island was plunged into chaos and routine class purges.
Ever since Kuomintang (KMT) Chairman Chiang, the one-time friend and later arch nemesis of Chairman Mao Tse-Tung, fled to Taiwan (or Formosa, the Portuguese name meaning “beautiful [island]”) in 1949, the place has been a hotbed of political friction. Naturally, not all locals welcomed Chiang’s heavy-handed, authoritarian rule. There was plenty of bloodshed in the streets under Chiang’s “White Terror” and masses of dispossessed citizens rebelled against his iron fist. But Chiang did have a few things going for him. When the KMT party arrived in Taiwan, they brought with them a huge portion of the mainland’s gold and foreign currency reserves. Much of the intellectual and business elite also followed in order to avoid the communist crush of Mao’s “Reds” back home. And, vitally and with the help of aid from the US, the KMT also instituted an import-substitution policy, whereby the country began to manufacture previously imported goods domestically. This policy was to prove an invaluable part of the small island’s economic growth in subsequent years.
After Chiang, the increasingly capitalistic, export-driven Taiwan grew its foreign reserves exponentially. Today it has the fourth largest stash in the world, behind only China, Japan and Russia. (As a point of interest, the US comes in 21st on the rankings, right between Poland and Libya.)
It’s not difficult to imagine a place like Taiwan, one of Asia’s four “Tiger Economies” (alongside Singapore, Hong Kong and South Korea), leading some kind of regional renaissance. But the plot here is just as much tragedy as it is comedy.
For one thing, a not-insignificant portion of the island’s 23 million people still lives hand to mouth. Your editor buys his fresh fruit and vegetables from a local night market right next to his building, where vendors shuttle their produce in from farms in the surrounding mountains on the back of smoke-spluttering mopeds. These people work long, hard hours and are by no means equipped to pick up the conspicuously lagging consumption duties abandoned by their cash-strapped American cousins. The lines on their smiling faces run deep with the stresses and pains of the recent past and of a life spent laboring for little in return.
Not two stops away on the world’s most advanced underground metro system, Taiwan’s tallest building, Taipei 101 (the world’s highest until the Burj Dubai opened earlier this month), towers as the centerpiece of the high-end retail area surrounding the City Hall. Streets there are lined with luxury items form Paris, Milan and Seoul. Vacationing shoppers gorge themselves on Hermès handbags and Prada pumps, the price tags of which would have been unimaginable here a few years ago.
To be sure, the island has come a long, long way over the past five or six decades. Where agriculture once made up more than one third of the GDP here, it now contributes less than 2%. The lion’s share of economic activity today belongs to the booming information technology and biotech industries. Semiconductors sales are a source of national university pride and cutting edge companies like Acer (TSE: 2353), Asus (TSE: 2357) and HTC Corporation (TSE: 2498) churn out $300 laptops and smartphones by the ton, which they then pump into hungry foreign markets.
But it is important to remember, especially when considering export driven/reliant economies, that not all demand is created equal. There is the kind forged in the crucible of the free market, rooted in sound money and underpinned by the desires of real people. Then there is the phantom, government-sponsored kind, masquerading behind a cloak of public stimulus boondoggles and debased currencies. Administrations from DC to Beijing and beyond are guilty of exactly this act of economic sleight of hand.
It is impossible to know exactly how much of the world’s current demand is real and how much is simply manufactured by make-work governments looking to pad their GDP figures with public works programs and easy money handouts. We’ve written in this space before about how liquidity inflows from the West, coupled with loose monetary policies locally, have pushed property prices and stock markets in China to bubble-like valuations.
Dan Denning, our mate who heads up the Aussie chapter of The Daily Reckoning, spent the week there warning his readers of China’s overly ambitious capital outlays.
“Now it would be presumptuous to say that all Chinese capital spending was somehow derivative of American consumer demand,” observes Dan. “China has other trading partners and markets, although without America things might not be so flash. But it is without doubt true that Chinese capital spending is a direct consequence of the global credit bubble.”
The faux demand plot is yet to fully reveal itself on the world economic stage, but it would be foolish to assume export dependent economies have not grown somewhat accustomed to bloated order books. Taiwan’s generational gains are hard fought and the people here are among the most intelligent, driven individuals we’ve ever met. It is hard to ignore, however, that on both sides of the Pacific an over-consuming, publicly-funded “Chi-merican” fat lady may already be singing her swansong.