Increased Electronics Demand Slows Taiwan’s Export Slump

China’s demand for high-tech electronics in May helped slow Taiwan’s nine-month export slump, underscoring the closer economic ties between the two countries as well as China’s growing importance as a target market in the Asian region.

Taiwanese exports fell 31.4% last month when compared to the same period last year, but improved on the 34.3% drop in April. Economists were expecting a 34% decline.

The island nation’s trade surplus exceeded economists’ expectations of $2.61 billion by posting a gain of $3.17 billion in May, versus $2.14 billion in April. Imports to Taiwan declined 39.1% from May 2008 to $13.01 billion, but that decline also was also an improvement from April’s 41.20% drop.

“The export declines have bottomed out, but it’s still too early to expect a full recovery,” Cheng Cheng-mount, chief economist at Citigroup Inc. (C) in Taipei, told Bloomberg News. “The pace of decline in shipments to China is easing as the stimulus measures start to take effect.”

As Taiwan enjoyed an economic growth rate that averaged about 8% a year in real terms over the past 30 years, generally conservative government policies, a steadily declining state involvement in the private sector and a tight focus on export growth combined to nurture that country’s emergence as a virtual export machine and a global economic powerhouse that services most of the world’s key technology sectors.

Taiwan was actually able to sidestep most of the fallout from the 1997 Asian Financial Crisis that badly stung such Asian neighbors as Korea. But the Taiwan economy hasn’t been able to shrug off the impact of the current financial crisis.

China’s continued emergence as a full-blown marketplace economy - and not just an exporter - is starting to temper some of the damage. Taiwan’s exports to China and Hong Kong totaled $6.75 billion, a decrease of 30% from the $9.64 billion reported a year ago, but considerably lower than the 37.5% year-over-year drop seen in the first five months of the year. The May exports to China were also up 9% from the $6.2 billion worth of goods sent to that country in April.

All told, China and Hong Kong accounted for 41.7% of Taiwan’s total exports for May, up from only 29.9% in January.

Exports to the United States were a different story, totaling $1.85 billion, a 28% drop. That was slightly higher than the 27.2% year-on-year change from January to May. But the exports to the United States also increased a bit from April.

The United States receives 11.4% of Taiwan’s exports.

Electronics exports contributed the most to Taiwan’s overall trade gains for May, increasing by $230 million. That was followed by chemical and optical products, which increased by $210 million and $200 million, respectively. Analysts expect that these sectors will continue to be vital to Taiwan’s recovery, particularly as demand for high-tech goods surges in Mainland China, where Taiwan operates many factories.

Some of those upbeat expectations are already having an effect. Chinese television makers expect to buy $4.4 billion worth of flat-panel-display products this year. And Taiwan giant Hon Hai Precision Industry Co. Ltd. - the world’s biggest contract manufacturer and a company that makes computer gaming consoles, PC motherboards and wireless phones for name-brand global companies - has boosted its factory work forces in both Taiwan and on the mainland to fill anticipated orders for hot products such as the Apple Inc. (AAPL) iPhone.

“Chinese demand has continued to help boost exports of our electronics and optical products such as flat panels … the increase in demand from Southeast Asia has been partly due to efforts made by the government to expand trade with the region,” said Lin Lee-jen, director of Taiwan’s Ministry of Finance statistics department.

Economic necessity has helped start to soothe the long-rocky relations between Taiwan and Mainland China. Just recently, for instance, the two signed trade-and-investment accords reached by the Association for Relations Across the Taiwan Straits (ARATS) and the Straits Exchange Foundation (SEF).

“Not only do the accords considerably broaden goals Beijing has pursued since 1979 in an effort to stimulate cross-Strait links, but they also remove many of the restrictions that presently hamper more direct business-and-investment ties,” said Money Morning Investment Director Keith Fitz-Gerald, an Asia investing veteran who just returned from heading an investment trip to China and Hong Kong.

As part of the ARATS/SEF agreements, Taiwan and China agreed to establish the regulatory framework needed for financial services firms to do business in each other’s markets. The two countries also called for the gradual establishment of a mutual clearing system for the Taiwanese dollar and Chinese yuan.

“Having such a system in place will not only enhance Mainland China’s interest in making additional investments into Taiwan, it will also accelerate interest among Taiwan’s investors and companies to seek profit opportunities in Mainland China,” said Fitz-Gerald, who is also editor of the Geiger Index trading service. “Expect these dealings to nurture a serious interest among international investors and accelerate stock-market action in both countries.”

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