Over the past six months, I’m not the only one who has seen the value of my investments plummet. After a 6 year bull run, the stock market was over-valued to begin with. On top of that, the housing bubble popped, poor sub-prime loan decisions have come back to haunt lenders, the national debt has been ballooning, and Ben Bernanke’s interventions have had the effect of socializing risk while privatizing profits. In short, it’s been brutal.
Juan Enriquez is the founding director of the Harvard Business School Life Sciences Project, a widely published expert on topics from the technical (global nucleotide data flow) to the sociological (gene research and national competitiveness), a former member of Celera Genomics founder Craig Venter’s marine-based genetic data collection team, and former CEO of Mexico City’s Urban Development Corporation and chief of staff for Mexico’s secretary of state. In the past, he played a role in reforming Mexico’s domestic policy and helped negotiate a cease-fire with Zapatista rebels. Here’s his TED talk on genomics. I enjoyed it.
In all honesty one of the factors that has led me to invest so much in Chinese companies is the undervaluation of the RMB. The explosive growth of the middle class and the economy as a whole is the main reason, but currency concerns definitely factor in. Yesterday, I stumbled on the most jaw-dropping estimate for RMB-appreciation I’ve seen yet.
Jim Rogers, chairman of Beeland Interests Inc. and a former partner of George Soros, said yesterday the yuan may quadruple in the next decade. If it did then the yuan would be at 1.8 to 1.9 to the US dollar. China’s economy would be at 13 trillion US dollar even if there was zero growth. I have noted that I expect China’s economy to pass the United STates on an exchange rated basis before 2020.
Non-deliverable forward contracts show traders are betting the yuan will reach 7.0070 in 12 months, a gain of 6.9 percent from the spot rate, and 6.95 by the end of 2008.
The government should revalue the yuan by as much as 20 percent, according to a report circulated inside the National Development and Reform Commission, Market News International said.
This would put the exchange rate at 6 to 1. China’s economy next year would be almost equal to Japan on an exchange rate basis.
Brian Wang: China Currency Update
Normally, I’d be extremely skeptical about this kind of prediction, but Brian’s proven himself to be an expert at predicting the future before.
The gloom in the air is almost palatable. For years now, most Taiwanese people I’ve known have not just been glum, but been down right pessimistic about the economy.
In one sense, it seems irrational. While Taiwan’s GDP growth since 2000 has been very poor, much of that can be attributed to currency fluxuations. If one looks only at PPP-adjusted 2006 data, Taiwan managed a very respectable 4.6% growth. So, why are people so gloomy? The answer is wage stagnation. Reuters reported on this:
“If salaries in Taiwan continue to stay at current levels, it will encourage white collar workers, such as managers, to go to China,” said Chou Ji, an economics professor at Shih Hsin University.
In the first eight months of the year, Taiwan’s average monthly salary rose 1.84 percent from a year earlier to T$46,646 (US$1,431), just a tad higher than inflation of 0.62 percent during the same period, statistics agency data showed.
During the same period, the average wage in South Korea rose 5.6 percent to 2.6 million won (US$2,830), Korea’s Labour Ministry said.
“What you see is that wage growth in Taiwan is very weak,” said Peter Sutton, Taiwan’s head of research at CLSA, adding that the island’s strong exports were not translating into a rise in wages. “There is much more optimism in the other countries.”
“The Taiwan exports sector is really strong, but the domestic sector is protected and … has very little foreign participation. So domestic consumers face much higher costs.”
CLSA said in a survey of income earners that 29 percent of respondents in Taiwan saw their income fall and 42 percent saw no increase in the past 12 months, with 32 percent saying that they were worse off than 10 years ago.
The average Taiwanese wage is about half that of the average Korean wage. Just a few years ago, Taiwan was ahead and now it’s fallen so far behind. Worse still, 32 percent of Taiwanese people report that they are worse off than they were 10 years ago. No wonder the average guy on the street is gloomy.
This first graph is based on the Euro, and the TWD is compared to the Korean Won, the US Dollar, the UK Pound, the Canadian Dollar and the Australian Dollar from 2000-2007.
The TWD came in dead last, with the USD barely edging it out.
This second graph is based on the US Dollar, comparing the same currencies over the same period of time.
Once again, the TWD is the clear loser, but what is most striking is how closely it hugs the US dollar graph. This is undoubtedly the result of the Taiwanese government’s unofficial attempts to peg the TWD to the USD. Some have argued that this is part of why consumers here in Taiwan are seeing rising prices.
Now to answer Michael Turton’s question:
Yes, (the TWD has) plummeted from…..28 to the Aus$ all the way to….$30, and that only the other day. In August it hit 25. Clearly there is a great deal of variation. The Korean Won? Well, in May it was 27.7, and on Friday, it was 28.2. Where is the cliff?
The AUD’s outperformance of the TWD is clear from the charts above. Here’s TWD graphed against the KRW:
Yes, there are short-term variations. However, the difference between the long term trends of the TWD and the KRW is stark. The difference is so great, in fact, that it could be argued that that’s the major reason Taiwan has seen less than 1.2% nominal GDP growth per year since the year 2000 while Korea, a very similar economy in many ways, has seen over 8.6% a year.
Update: Since Karl has accused me of “cherry picking” the data, here is ten years of currency data, starting from 1997. Even with the Asian Economic Crisis that decapitated the Korean Dollar, it still beat out the Taiwan Dollar. Furthermore, the Taiwan Dollar lost nearly 20% of its value against the US dollar, and about 40% of its value against the Canadian Dollar and the British Pound. It really would take “cherry picking” to find any long term span in which the Taiwan Dollar has beaten the Korean dollar in recent years.
As a relatively long term resident of Taiwan, I have some interest in its economy. Especially now that I’m involved in business here, it isn’t wise to ignore what I read and hear. One thing I’ve heard again and again is anguish at how much we’re falling behind our closest rival, Korea.
I suppose comparisons between Taiwan and South Korea are inevitable. Both were colonized by the Japanese early last century, people of both were split from their families as a result of World War II, and both went on to become booming manufacturing centers in the 80′s and 90′s. Right now, Korea and Taiwan are each involved in electronics markets and both invest heavily in China. Korea is China’s #1 foreign investor, and the Taiwanese are putting even more money into the mainland than the Koreans are, via 3rd parties (since direct investment is restricted by the Taiwanese government). Comparisons are inevitable.
The most logical place to start is with GDP growth.
|GDP per capita, in US dollars|
All data from the IMF, 2006 data are estimates.
In terms of annualized nominal growth, that gives Taiwan slightly less than 1.2% per year, and Korea over 8.6% per year. However, the major factor for this difference has been the precipitous drop in the value of the Taiwan Dollar. Over the last several years, the US dollar has weakened abysmally, but the Taiwan dollar has been losing ground even against the US dollar. The following graph charts the strength of the Taiwanese and Korean currencies against the USD:
This is bad, but it isn’t all bad. A weaker currency means that people will be paying more for imports (as well as domestic products that compete with them), and that their savings are worth less. It is a boon for exporters, though, and exports make up a crucial portion of Taiwan’s economy. All things considered, I’d much prefer to have Korea’s economy, but they do have other problems, such as high housing and labor costs.
All data from the IMF, 2006 data are estimates.
The most common explanation I see in Taiwanese media is that Taiwan’s small business-based economy can’t keep up with Korea’s huge conglomerates. There are many reasonable arguments to make for economies of scale, but while Korea was suffering through the SE Asian economic crisis in 1998, their newspapers were full of stories about how much more flexible Taiwan’s small business-driven model was.
One other thing that comes up is the huge amount of turnover in Taiwanese government positions after the DPP took power in 2000. It definitely had some economic cost, and a similar though smaller phenomena may repeat itself if 馬英九 wins the 2008 elections. However, any sort of cost to that sort of turnover would has been minimal. In fact, South Korea’s political scene has been more volatile, particularly in regards to Roh’s impeachment.
One thing that really is costing Taiwan, is the regulations on investment in China. Since direct trade is illegal in many cases, companies work via shell companies in Hong Kong, Macau, Singapore, or other areas. Every time business is done in that way, the intermediary takes a cut. With the volume of business the Koreans and Taiwanese do in mainland China, Taiwan’s extra frictional costs add up. Not being able to make direct flights results in a cost, too, and it’s the Taiwanese business that has to bear the weight of it.
The three-links problem will likely be dealt with soon, regardless of the result of next year’s elections, but barring any surprises, Korea’s economy will probably continue to pull ahead. Their free trade agreement with the US will only accelerate their already impressive growth.
Related Post: Salary stagnation: The reason Taiwan’s middle class suffers
Related Post: TSMC CEO Morris Chang on Taiwan
Milton Friedman, who passed away less than a year ago, was undoubtedly one of the greatest minds of our time.
Milton Friedman (July 31, 1912 – November 16, 2006) was an American Nobel Laureate economist and public intellectual. An advocate of laissez-faire capitalism, Friedman made major contributions to the fields of macroeconomics, microeconomics, economic history and statistics. In 1976, he was awarded the Nobel Prize in Economics for his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy.
According to The Economist, Friedman “was the most influential economist of the second half of the 20th century…possibly of all of it.” Alan Greenspan stated “There are very few people over the generations who have ideas that are sufficiently original to materially alter the direction of civilization. Milton is one of those very few people.” In his 1962 book Capitalism and Freedom, Friedman advocated minimizing the role of government in a free market as a means of creating political and social freedom.
Wikipedia: Milton Friedman
Friedman’s words about the War on Drugs are just as relevant today as they were two decades ago. Currently, America leads the entire world in prison population, both in total number, and on a per-capita basis.
The proper role of the government is to prevent other people from harming an individual. Government never has any right to interfere with an individual for that individual’s own good. The case for prohibiting drugs is exactly as strong and as weak as the case for prohibiting people from over eating.
We all know that over-eating causes more deaths than drugs do.”
The following video is about Milton’s idea about the limited role of government:
Milton’s definitive work on the subject, considered by many to be amongst the 100 most influential post WWII books ever written, is Capitalism and Freedom.