20100502 ECFA effect will take time

ECFA effect will take time

Sunday, May 02, 2010, Page 8

How would Taiwan’s stock market perform if an economic cooperation framework agreement (ECFA) with China were signed this year?

Figures released by National Chengchi University’s Center for Prediction Market on Thursday put the probability that an ECFA would boost the TAIEX at 75 percent, but the odds of the benchmark index reaching 10,000 points this year at just 33.3 percent.

Investors have been cautious about an ECFA during the run-up to the signing and analysts have said an ECFA would only be a mildly positive market factor.

With the TAIEX showing a decline of 2.25 percent so far this year, no one should be surprised if the ECFA’s signing does not meet original market expectations, given what we have already learned from the signing of a cross-strait memorandum of understanding on financial supervision last year.

However, the good news is that major technology firms in Taiwan have posted stronger-than-expected first-quarter earnings over the past two weeks. Many of them also offered positive projections for the second quarter and the full year.

These results from companies such as Taiwan Semiconductor Manufacturing Co, AU Optronics Corp, HTC Corp, MediaTek Inc and Acer Inc showed the local technology sector has entered the second quarter at full steam, even though the current quarter is the traditional low season and many companies still face shortages of labor, components and raw materials.

The strong performance in the technology sector — the latest evidence of a recovery in the nation’s export-reliant economy — should provide support to the local stock market amid heightened concerns over China’s continued efforts to rein in property prices and the Greek debt crisis, which some fear could have a spillover effect to the global economy, as well as Taiwan’s.

Yet this would simply be a best-case scenario for anyone who plans to load up on shares, because the market has already priced in the impact of recent good news and will easily fall on whatever bad news hits — something like Iceland’s volcanic ash, the fraud charges brought against Goldman Sachs and the central bank’s heightened measures to control the inflow of hot money that has caused market fluctuations over the past few weeks.

Investors may well have taken in good corporate earnings, but they should always be cautious about companies’ positive business projections. Moreover, the global economic recovery underway is gradual and uneven, strong in emerging markets and weak in developed ones.

Of course, investors are not all pessimistic, as the economic conditions in this country are better than they were six months ago. Economists have not overlooked the strength of Taiwan’s economic recovery either. Last week, the Taiwan Institute for Economic Research forecast 5.11 percent GDP growth for this year, citing rising private investment and exports. A week ago, the IMF offered an even higher forecast of 6.5 percent.

Even so, a major risk to the projected growth is the central bank’s move to withdraw its monetary stimulus measures — which many economists have kept on talking about but, although they managed to agree on the form of action the central bank should take and when — in an attempt to deal with potential inflation and asset bubbles in this country.

An ECFA with China certainly will certainly have a long-term impact on Taiwan’s economy, but it will do little to help Taiwan’s unemployment, as suggested in the National Chengchi University study. It would be a while before the agreement could make a meaningful contribution to Taiwan’s economy.