Final thoughts on Taiwan’s Saturday elections
On Saturday Taiwan will hold presidential and legislative elections (see our background report HERE). There have been no major plot turns since our January 4 update (link HERE), which was based on the final public opinion polls in the race. Those polls showed DPP candidate and current vice president William Lai as the front runner in a race that remains highly competitive, with a margin of roughly 5 percentage points over his main challenger Hou Yu-ih of the KMT party – a much narrower margin than in the past two election cycles in which the DPP cruised to victory over the KMT. Hou thus has the chance to upset Lai if enough factors swing in the KMT’s favor, including voter turnout and the potential gain of votes from supporters for the third place candidate Ko Wen-je.
As a reminder, a victory by the DPP’s Lai would likely be neutral-to-negative for investors, continuing (and perhaps incrementally worsening) the tense status quo between China and Taiwan. Lai would follow the foreign policy approach of current president Tsai Ing-wen, who has stressed Taiwan’s autonomy from China and strengthened relations with Washington without crossing Beijing’s red lines by moving towards formal independence. An upset by the KMT – which favors political dialogue with China – should be modestly positive for markets as it would lower, at least for a time, tensions with China and the tail risks of a crisis or conflict.
News in the final days of the race hasn’t been dispositive for any candidate. On Thursday, the KMT’s Hou said that he would not engage in reunification talks with China during his term if elected. That comment was in part intended to distance Hou from an interview in which former president Ma Ying-jeou, a key KMT figure, said that he had “trust” in Xi Jinping. Hou is trying to assuage concerns in Taiwan that the KMT would move too close to Beijing if voters return the party to power. It is not clear whether either set of comments will impact views of voters so close to the election. The greater significance is probably to underscore that there is little political support for anything that even smacks of reunification with China. The KMT is trying to walk a line by arguing that political dialogue with Beijing is important to preserve peace, but that reunification remains at best a (very) distant prospect. Thus, while a KMT victory would lower tensions, the effect may be temporary. There remains a fundamental gap between a regime in Beijing committed (at least rhetorically) to an eventual goal of reunification and a public in Taiwan that wishes to preserve practical autonomy. This is the core dynamic that fuels tensions between Taiwan and China, and helps inflame US-China tensions, though we continue to believe the probability of conflict in the next several years remains very low.
Expect more analysis from us after the results come in. In the meantime, a few points on what to watch:
- Results of the election will likely be known by roughly 7am ET on Saturday (8pm in Taiwan)
- While the presidential election is the most important watchpoint, legislative elections also matter. The DPP is likely to lose its majority in the legislature, and a strong showing by the KMT and the main third party (TPP) would lessen the sting for Beijing of a DPP presidential victory.
- It will be important to monitor Beijing’s initial reaction to the vote, especially if the DPP wins. One should at least expect strident rhetorical warnings for Lai not to pursue “independence,” and quite possibly saber-rattling such as increased Chinese military activity near Taiwan. However, the prospect of dramatic action by Beijing is unlikely, for reasons detailed in our earlier reports linked to at top.
- The US government has no official position on the election and has strong ties with both parties. However, a KMT election would cause consternation in some quarters of Washington, as the Biden administration as well as members of Congress would seek to understand how Hou would handle relations with China and what this would mean for issues such as US defense cooperation with Taiwan and the compliance of TSMC and other Taiwanese tech companies with US export controls on China.
China data show private demand weak, infrastructure stimulus in the pipeline
On Friday, China released December data on credit, inflation and trade. Trade data modestly beat analyst expectations, credit data disappointed, while inflation (both CPI and PPI) were roughly on track. A much broader data release is coming Tuesday (Jan. 16) at 9pm ET with the release of Q4/2023 GDP data and December economic activity indicators.
In the meantime, today’s releases suggest two main takeaways. First, domestic demand, particularly for the private sector, remains weak. Second, infrastructure-focused stimulus is in the pipeline for Q1, though its likely effects in countering weak demand should not be overestimated. Some observations from the data to illustrate those two points:
- Imports in USD beat forecasts but were up only 0.2% y/y in December despite a low base from last year. Commodity imports such as iron ore outpaced overall imports which likely reflects anticipation of coming infrastructure spending as well as some of that spending already trickling in.
- Credit/financing growth was driven by a surge in government bond issuance to fund infrastructure projects as well as refinance maturing debt. If one strips out government bond issuance, aggregate financing (“total social finance”) was 1% lower than in December 2022 and 15% lower than in December 2021. Household mortgages remain deeply depressed. In short, private sector demand for credit remains weak.
- While government agencies borrowed more in December, their withdrawals of deposits were below the seasonal pattern, suggesting that stimulus spending in December was modest and that Beijing may be saving this fiscal firepower for Q1. China will comfortably meet its 5% growth target for 2023 but faces a tougher task this year, when the base effects become more challenging.
- Inflation data also pointed to weak overall demand. Consumer prices fell -0.3% y/y, slightly better than -0.5% in November, with core CPI (excluding food and energy) at 0.6% (same as November). Producer prices were down -2.7% y/y in December, compared to 3% in November.
In addition to the big data release coming on Tuesday, we will be closely watching for further signals on the stimulus front. To help support infrastructure and other quasi-fiscal stimulus, Beijing is likely to incrementally step up monetary easing in Q1 with cuts to interest rates (perhaps as soon as Monday) and banks’ reserve requirements.
However, stimulus as always needs to be assessed relative to the scale and nature of the downward pressures on the economy. In 2024, as in 2023, these include the ongoing drag from property downturn, local government debt burdens, and weak private sector confidence. Infrastructure spending and government-directed credit to the manufacturing sector will provide some support to commodities in coming months but have relatively limited impact in boosting broad private sector demand, particularly in the household sector. Based on current signals, monetary easing is unlikely to be bold enough to quickly boost private demand or confidence, especially with real borrowing rates for corporates likely to remain high given ongoing producer price deflation.
As we wrote after the Central Economic Work Conference (HERE) and release of November data (HERE), our big picture outlook for 2024 is one in which the production side of the economy outpaces demand, an environment decent for commodities but less positive for the revenues and profits of domestic and foreign firms in China’s market.
With thanks to Houze Song for his contributions to the analysis.
