Economics

DBS Flash
Taiwan vs Hong Kong: outperformer vs underperformer
Economics/Taiwan/Hong Kong/Growth

Group Research November 1, 2019

30Ma Tieying
Economist

• Taiwan’s third quarter GDP beat

consensus and our forecasts, recording
a decent 2.9% YoY growth

• The island has started to benefit from

the trade diversion and investment
Samuel Tse repatriation effects of the China-US
Economist
trade war; the electronics sector is also
showing signs of bottoming-out

• In contrast, Hong Kong entered a

technical recession in 3Q with GDP
contracting sharply by -2.9% YoY

• The city’s growth performance is

Please direct distribution queries to
Violet Lee +65 68785281 violetleeyh@dbs.com dragged by both consumption and
exports, amid political uncertainties
and lingering China-US trade tensions
Asian NIEs: GDP growth
% YoY
• Implication for our forecasts: We are
5
revising up Taiwan’s GDP growth
4
forecasts for 2019-20, to 2.3% (vs 1.9%)
3 and 2.0% (vs 1.8%), respectively
2

1
Hong Kong’s GDP estimate for 2019 is
downgraded further to -1.7% from 0%.
0
Hong Kong The 2020 forecast is revised up to 1.5%
-1
Singapore from 0.5%, to reflect the low base effect
-2 South Korea
Taiwan
-3
2016 2017 2018 2019
Sources: CEIC, DBS

Refer to important disclosures at the end of this report.

Taiwan vs Hong Kong: outperformer vs underperformer
Taiwan
GDP growth rose 2.9% YoY in 3Q, faster than the
2.4% in 2Q and beating the consensus / our
forecast of about 2.5%. With growth averaging
2.4% in 1Q-3Q, Taiwan clearly outperformed its
regional peers including South Korea (1.9%),
Singapore (0.4%), and Hong Kong (-0.6%) so far
this year. In contrast, Taiwan’s growth was the
slowest among the Asian NIEs through the past
four years from 2015 to 2018.
Taiwan: GDP growth & contributions
% ppt, YoY Private consumption
6 Gross capital formation
Net exports
5 GDP
4 2018
3 Sources: CEIC, DBS
2
1
0
-1
-2
-3
2016 2017 2018 2019
Sources: CEIC, DBS
The economy may have started to benefit from
the trade diversion and investment
repatriation effects of the China-US trade war.
Exports of goods and services grew 4.2% YoY in
3Q, the second consecutive quarter of solid
gains. And the rise was mainly driven by exports
to the US market (18.0%, in nominal terms).
Gross capital formation slipped 1.0% in 3Q, but
this came after two quarters of very strong
expansion (7.4% in 1Q, 5.9% in 2Q). According
to the Invest Taiwan Office, the mainland-based
Taiwanese manufacturers have continued to
expand the onshore investment activities, in a
bid to diversify the supply chains and avoid the
US tariffs imposed on China-made products.
November 1, 2019
The total amount of investment repatriation
has risen further to TWD620bn as of late-
October.
Taiwan: Exports by market
% YoY
40 US China & HK
Europe Japan
30
20
10
0
-10
-20
2019
Cyclically, the electronics sector has showed
some signs of bottoming out. The rise in goods
exports in 3Q was largely driven by electronic
components (3.9% YoY, in nominal terms). It
was reported that orders from the Apple supply
chain have started to pick up, as the new iPhone
11 products received better-than-expected
demand worldwide, thanks to the more
competitive pricing strategy. Meanwhile, the
5G related demand appears to have kicked in.
TSMC recently announced to increase its capex
plan to USD14bn-15bn for 2019 (vs the previous
estimate of USD11bn), citing stronger-than-
expected growth in the 5G smartphone market.
Looking ahead, investment repatriation and
trade diversion are likely to be sustained next
year. Regardless of a so-called Phase 1 trade
deal between China and the US in the near
term, the two countries’ conflicts on thorny
issues like industry subsidies and cybersecurity
will likely remain in place for years. The
lingering uncertainties in China-US relations
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Taiwan vs Hong Kong: outperformer vs underperformer November 1, 2019

would continue to prompt Taiwanese Hong Kong

manufacturers to diversify their supply chains.
We have further downgraded Hong Kong’s
Whether the electronics sector can sustain a GDP growth forecasts to -1.7% from 0% for
recovery is a bigger question mark. The overall 2019. Due to the low base comparison this
global demand outlook remains weak, given the year, we revised up our forecast for 2020 from
risk of US/China slowdown in 2020 and the 0.5% to 1.5%. Advance estimate on the 3Q19
unresolved trade tensions between the world’s real GDP growth was -2.9%, the first YoY decline
largest economies. Note that smartphones since the Global Financial Crisis in 2008-2009.
have been spared from the US tariffs so far, as On a sequential basis, it contracted by 3.2%
Washington has postponed a planned 15% tariff after recording a 0.5% drop in 2Q. Hong Kong
on the China-made electronics products from has entered technical recession.
September to December. Whether these tariffs
will be further postponed/cancelled still Hong Kong: GDP and inflation
% (YOY) % (YOY)
depends on details of the Phase 1 trade deal. 5.5 5.0
4.5
3.5 4.0
Taiwan: Exports by product
% YoY 2.5
3.0
30 1.5
Electronics
Non-electronics 0.5
2.0
20 -0.5
-1.5 1.0
10 -2.5
-3.5 0.0
0 2015 2016 2017 2018 2019

Real GDP GDP Trend growth CPI (RHS)

-10 Source: CEIC, DBS

-20 Third quarter performance was dragged by the

2016 2017 2018 2019
subdued local consumption sentiment. Private
Sources: CEIC, DBS consumption expenditure, which accounts for
over 60% of the city’s economic activities,
Considering all, we are revising up Taiwan’s
plunged by 3.5% amid political uncertainties.
2019-20 GDP growth forecasts modestly, to
Shops have not been able to operate over the
2.3% (vs 1.9%) and 2.0% (vs 1.8%), respectively. weekend. This was again the first negative
reading since the Global Financial Crisis.
Ma Tieying
Consumer confidence was further affected by
the negative wealth effect from volatile stock
market.

A pro-longed domestic unrest will eventually

feed through to the labour market. The
unemployment rate of consumption and
tourism related sectors (16.5% of labour force)
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Taiwan vs Hong Kong: outperformer vs underperformer
already leapfrogged from 3.9% in 2Q19 to 4.9%
in 3Q19, lifting the headline jobless rate from its
20-year low of 2.8% to 2.9%. Yet, we do not
expect the unemployment rate to rocket due to
shortage of labour amid aging population. Also,
retail premise owners may offer temporary
rental adjustments for tenants. The risks of
large-scale closure of businesses and laid-off
are limited.
Hong Kong: Retail Sales and Hang Seng Index
% (YOY) Retail sales value Index
40 Hang Seng Index (RHS) 34,000
30
31,000
20
10 28,000
0 39.1% and 34.2% in August and September
25,000
-10
22,000
-20
-30 19,000
2015 2016 2017 2018 2019
Source: CEIC, DBS
Hong Kong’s economic condition remains
clouded by the lingering trade tensions
between China and the US, Hong Kong’s top
two export destinations. Merchandise exports
have contracted 11 straight months since
November 2018. By country, outward shipment
to the US and China fell 24.3% and 4.6% in
September respectively. Outward cargoes to
other advanced economies (EU: -16.6%; Japan:
-4.1%) and emerging markets (ASEAN: -2.0%;
India: -10.8%) were also sluggish alongside
easing global demand.
Mirroring the conflicts over tech products
between China and the US, re-exports of
machinery and transport equipment contracted
by 5.4% in September. This was the 8th
consecutive decline. Trade finance continued to
November 1, 2019
shrink (-2.1%) despite a low-base comparison
(September 2018: -0.6%), pointing to weak
business confidence in the external sector.
Against this backdrop, exports of services
recorded double-digit decrease of -13.7%. The
Hong Kong stock market was volatile in the
quarter. Cross-border financial activities
decelerated, thereby affecting the transport,
financial and other business services sectors.
Exports of travel services and visitor spending
were also dampened by a weaker Chinese
yuan and domestic instability. Retail sales
dropped by 23% in August, with tourist
spending accounting for 40% of the sector’s
performance. In fact, visitor arrivals slumped by
respectively. Tourists’ hot picks such as clothing,
jewellery, as well as cosmetics/medicines fell by
over 30%.
Hong Kong: Merchandise trade statistics
% (YOY, 3mma) HKD bn
20 200
Trade balance (RHS)
15 150
Exports
Imports
10 100
5 50
0 0
-5 -50
-10 -100
2014 2015 2016 2017 2018 2019
Source: CEIC, DBS
Gross domestic fixed capital formation
decelerated further to a new decade low of
-16.3% in 3Q19 from -10.8% in 2Q19. The
pessimistic investment sentiment indicated a
weak business expectation. The PMI only
improved slightly to 41.5 in September after
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Taiwan vs Hong Kong: outperformer vs underperformer
falling to the historical low of 40.8 in August.
The residential property market consolidation
also dragged the investment performance. In
fact, Centaline Property Centa-City Leading
Index fell by 5.1% after hitting the new record
high in June.
Yet, there will be a rebound in property price
despite economic recession. The global
monetary easing condition, the latest Prime
Rate cut, and HKMA’s Countercyclical Capital
Buffer cut will render some support to the asset
prices. More importantly, transaction
rebounded (that of Centaline 10 major
properties up 29.4% m-o-m in October) shortly
after the announcement of Chief Executive
Carrie Lam’s Policy Address. With the raised cap
on the value of properties under the Mortgage
Insurance Programme, potential home owners
could access the property market with higher
leverage and weaker stress test requirements.
Also, the land supply policies such as Use of
Lands Resumption Ordinance and Lantau
Tomorrow (artificial island for 1.1mn
population) remains as medium-long term
solutions. Residential price is set to rise.
November 1, 2019
On the monetary front, capital outflows
remained manageable. Although M2 growth
has slowed to 1.9% in end of 3Q from 3.5% in
June, HKD deposits reversed the m-o-m drop of
1.6% in August to advancement of 0.6% in
September. 1M HIBOR also hovered at 1.5%-
1.9% in October. Both USD/HKD spot and its
12M forward outright were still well within the
7.75-7.85 convertibility band. Also, Hong Kong
is well-positioned to safeguard its HKD peg.
The Exchange Fund is substantial at USD530bn
or more-than-double of the monetary base.
CPI inflation edged down from 3.5% in August
to 3.2% YoY in September. Yet, this remained as
a relatively high level. Food price continued to
record double-digit growth of 13.1% from
increased pork (swine fever), beef, chicken and
lamb (through substitution effect) prices in
China. Against a weaker growth outlook
alongside insufficient stimulus package
(HKD21bn, or 0.7% of GDP), stagflation risk is
emerging.
Samuel Tse
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Taiwan vs Hong Kong: outperformer vs underperformer November 1, 2019

Group Research
Economics & Macro Strategy

Taimur Baig, Ph.D.

Chief Economist - G3 & Asia
+65 6878-9548 taimurbaig@dbs.com

Chang Wei Liang Ma Tieying, CFA

Strategist Economist - Japan, South Korea, & Taiwan
+65 6878-2072 weiliangchang@dbs.com +65 6878-2408 matieying@dbs.com

Nathan Chow Radhika Rao

Strategist - China & Hong Kong Economist – Eurozone, India, & Thailand
+852 3668-5693 nathanchow@dbs.com +65 6878-5282 radhikarao@dbs.com

Masyita Crystallin, Ph.D. Irvin Seah

Economist – Indonesia & Philippines Economist - Singapore, Malaysia, & Vietnam
+62 21-2988-4003 masyita@dbs.com +65 6878-6727 irvinseah@dbs.com

Joanne Goh Samuel Tse

Regional equity strategist Economist - China & Hong Kong
+65 6878-5233 joannegohsc@dbs.com +852 3668-5694 samueltse@dbs.com

Eugene Leow Duncan Tan

Rates Strategist - G3 & Asia FX and Rates Strategist - Asean
+65 6878-2842 eugeneleow@dbs.com +65 6878-2140 duncantan@dbs.com

Chris Leung Philip Wee

Economist - China & Hong Kong FX Strategist - G3 & Asia
+852 3668-5694 chrisleung@dbs.com +65 6878-4033 philipwee@dbs.com

Sources: Data for all charts and tables are from CEIC, Bloomberg and DBS Group Research (forecasts and transformations).

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