Pop quiz: What is the strongest economy in East Asia right now? One that rode out the pandemic surprisingly well, producing massive stock gains in the process.
If you're thinking China, you're half-right. Taiwan is outdoing its much larger neighbor, both in economic and stock market terms.
Taiwan's economy grew 3.0% in 2020, fresh figures show this week. With China posting growth of 2.3% for last year, it's the first time in 30 years that the little island across the Taiwan Strait has outperformed Big Brother.
Last year, Taiwanese stocks also edged their mainland rivals. The S&P Taiwan index was up 37.8% in 2020, a narrow advantage over the still-impressive 36.7% growth for the S&P China 500.
Chinese stocks had been the top performers in Asia for much of last year. However, they lost their luster by year-end and were caught and then outdone by the export-driven economies in Taiwan and South Korea, both markets dominated by semiconductor makers. The Seoul market posted an even-better 45.8% gain in 2020, largely on the back of Samsung Electronics.
In Taiwan, the largest three components of its index all make electronics of some sort. Taiwan Semiconductor Manufacturing Corp. (TSM) , better known simply as TSMC, is the world's largest chip foundry, making chips under contract to other companies; Hon Hai Precision Industry HNHPF is better known as Foxconn, Apple's largest supplier and assembler; and MediaTek (MDTKF) designs chipsets for electronics such as smartphones, high-definition TVs, computers and navigation systems.
Tech is the flavor of every month, it seems. But the pandemic has played into the specific strengths of Korean and Taiwanese manufacturers. The necessity to work from home has driven spending on the kinds of home-office and computing products that contain parts from or were outright made in those nations. At the same time, our quest for home entertainment has surged. Last, the rollout of 5G telecommunications networks continues, promising faster data transmission speeds and an increase in the capabilities of smart devices in all walks of life.
"Asian exporters excel in the exact sectors that benefit from the unique circumstances of the pandemic," Société Générale notes in its report "Top Questions for Asia Pacific in 2021." The main risk factor facing the Taiwanese economy now would be a sharp slowdown in the tech cycle, which does not seem likely, or a dramatic rise in cross-strait tensions, which is simmering away but apparently far from a boil.
How to handle Taiwan diplomatically will be a test of new U.S. President Joe Biden. He passed the first pop quiz with his inauguration. It was the first time that the de facto Taiwanese ambassador to the United States had attended the event in an official capacity. The current "ambassador," Hsiao Bi-khim, is a close ally of Taiwanese President Tsai Ing-wen.
Taiwan is the nation that dare not speak its name. It's a country, but China systematically engages in suppression of this reality, preventing Taiwan from joining global entities such as the World Health Organization and the United Nations. Beijing also blocks diplomatic recognition of Taiwan and has whittled away at the island's official allies over the years. Beijing will only accept diplomatic relations with nations that sever them with Taiwan.
Economically, however, Taiwan and China are inextricably tied. Many Taiwanese companies have manufacturing bases in the mainland. The direction of some of that investment reversed during the Sino-U.S. trade war launched by former U.S. President Donald Trump. Tax breaks for the reshoring of Taiwanese businesses had led to US$38 billion of investment by Taiwanese companies in Taiwan as of last September, with Innolux TW:3481, Accton Technology ACCCF and Quanta Computer QUCCF all building new factories back home.
Trump is still extremely popular in Taiwan, where many people see him as a staunch defender of the island's rights and identity. But Biden, through National Security Council spokeswoman Emily Horne, has reaffirmed on taking office that the U.S. commitment to Taiwan is "rock-solid."
"President Biden will stand with friends and allies to advance our shared prosperity, security and values in the Asia-Pacific region - and that includes Taiwan," Horne said, in the most direct comments to date by the new administration. The United States severed formal ties with Taiwan in 1979 but is required by law to help Taiwan defend itself.
China has recently increased incursions into Taiwanese air space, including over the weekend after Biden's inauguration. Chinese jets and bombers often cut into the very corner of what Taiwan considers its air territory and then turn back out of it, nuisance flights that necessitate Taiwan scrambling fighter jets of its own, putting wear and tear on its far-smaller air force.
In the highest-profile speech by a Chinese official since Biden took office, a member of China's powerful 25-person Politburo warned Washington to stop interfering in matters that China considers its internal affairs, such as Taiwan, Tibet, Hong Kong and Xinjiang. "They constitute a red line that must not be crossed," Yang Jiechi said. China is always rambling on about red lines and crossing those imaginary lines in the sand.
So we will need to see how the trade and diplomacy plays out. Biden says he plans to use diplomatic means to counter China's expansionism and aggressiveness in Asia. He has promised to review the Trump-era tariffs, but those remain in place.
Virus? What virus?
Taiwan's efforts to contain the coronavirus have been stunningly successful. It was quick to stop travel to China, as of Jan. 26 last year, five days after the island reported its first confirmed case of Covid-19. It then decided on March 19 to close its borders to the vast majority of foreign visitors. At last count, the island of 23.6 million has posted only 915 cumulative Covid-19 cases. There have been eight Covid-linked deaths. That's right, eight.
As a result of its quick action and the willingness of the Taiwanese people to curtail activities and wear masks, life has gone back to something approaching normal far faster than just about anywhere. The nation never went into a full lockdown.
Despite that success, there is cautious sentiment about prospects for recovery, whether that's for corporate or personal spending. Private investment expenditures remain weak and fell 1.4% last year, so the economy was given a hefty boost by the 4.8% increase in government spending.
SocGen notes in its 2021 outlook report that the global spurt in digitization could lead to "structural growth" for top tech exporters, especially Taiwan. TSMC and MediaTek have been particularly good at grabbing market share while there's a bigger market pie due to 5G, smart devices and artificial intelligence research and development.
No one expects Taiwan to continue to set the pace in East Asia. Its economy may rise 3.8% in 2021, whereas China should experience a bounce-back of something close to 9.0%. But Taiwan's recent successes in terms of stock gains and business growth should continue, a surprise beneficiary of the pandemic that has laid low so many.