How Taiwan will be hit by China's economic slowdown

China is Taiwan's important export market.

According to DBS, China’s GDP growth decelerated to 7.5% YoY in 2Q from 7.7% in 1Q. With the new administration focusing on structural reforms rather than short-term cyclical stimulus, it looks increasingly likely that the softness in the Chinese economy will persist for some time. 

Given the close trade and investment ties across the strait, needless to say, the impact of China slowdown on Taiwan will be significant.

Here's more:

The manufacturing sector will be most sensitive to China slowdown. Exports to China and Hong Kong account for 40% of Taiwan’s total exports. Even if
measured by export orders (a better indicator for the source of final demand), China’s share is a large 25%.

Taiwanese firms sell not only consumer electronics to China, but also industrial electronics, machinery and industrial materials.

The latter group will be vulnerable to a downward adjustment in China’s fixed asset investment. The segments that are highly dependent on Chinese demand include precision instruments, chemicals, electronics, electrical machinery and plastics & rubber.

The cross-strait links of services trade and investment have also been strengthened in recent years. Taiwanese banks have boosted their China exposure since the financial MOU took effects in 2010.

Loans amongst the offshore banking units(OBU) have expanded strongly, driven by financing demand from the subsidiaries of Taiwanese firms with operations on the mainland.

The outstanding size of OBU loans currently stands at USD 75bn, equivalent to about 10% of total bank loans. If the profitability and debt servicing capabilities ofthe Chinabased Taiwanese firms deteriorate, there could be some modest pressures on banks’ asset quality.

Meanwhile, tourism trade with China has also grown rapidly since Taiwan relaxed visa requirementsfor mainland visitorsin 2008. China isthe largest tourist arrival group to Taiwan nowadays, contributing a large share of 35%. Nonetheless, we think the impact of China slowdown on Taiwan’s tourism sector will be limited.

Consumption growth in China held up relatively well during the past economic downturns. More importantly, the rise in Chinese tourists visiting Taiwan starts from a low base and the scope of further growth remains large, as Taiwan is a new travel destination for most mainland residents.