An Island of Prosperity Amid Asia's Gloom

A lonely nation has become even lonelier.

Taiwan, which few countries officially recognize, was an economic shining star yesterday as much of Asia sank further into a financial black hole. It defied regional market gloom as its stock index and currency rose.

How has this island nation, which China calls a "renegade province," been able to defy the global economy's cold wind that has put much of Asia on its knees?

"Taiwan has some of the best economic fundamentals in Asia," says Richard Margolis, regional strategist at Merrill Lynch & Co. in Hong Kong. Buoyed by $80 billion in foreign reserves, steady customers outside of Asia, and nimble companies able to adjust quickly, it has seen only a relatively minor decline in its currency and stock markets.

One example of Taiwan's ability to weather the crisis is its leading bicyclemaker, Giant Manufacturing, which has stayed on the cutting edge of design and innovation and made sure it sells globally. "We have quite a limited market in Southeast Asia," says Giant's president, Antony Lo. Taiwan's best-known computermaker, Acer, has also prospered.

"Our companies are world-class and depend mainly on sales to North America and Europe," says Rick Hsu at Capital Securities.

As Asia's markets plummeted over the past year, Taiwan's currency fell only about 15 percent, and its stock market dropped by only 9 percent. Economic growth this year may be 6 percent, still among Asia's fastest.

"When the New Taiwan dollar was depreciated, it meant our price [advantage] became stronger," Giant's Mr. Lo says.

Also helping Taiwan is the fact that "it has functioning bankruptcy laws, an economy with a very substantial cushion of small and medium-sized businesses that have a strong equity base and little debt, and a banking system that hasn't gotten itself over its head by borrowing short externally and lending long domestically," Mr. Hsu says.

A decade of preparation

Taiwan's economy has been upgraded rapidly in the past decade. More than 40 percent of exports are now capital- and technology-intensive products. Labor-intensive products make up less than 20 percent of exports.

Because most companies in Taiwan produce high-value-added products, they are less victimized by currency depreciation. Unlike Thai or Indonesian firms, Taiwanese firms were prevented by strict capital controls from taking on cheap foreign-currency loans for speculative projects.

And unlike South Korea's giant conglomerates, 98 percent of Taiwan's enterprises are small- and medium-sized.

"These businesses have been very flexible in responding to global market forces," says P.K. Chiang, the chairman of Taiwan's Council for Economic Planning and Development. "By sharing information, they are able to form a very good network for production and adjust their policies quickly to changes in the marketplace."

Some Taiwanese are delighted at the prospect of snapping up good Asian companies strangled by a lack of credit. But the majority of Taiwanese businessmen are cautious. They say they do not think Asia's troubles have come to an end. And they are jittery over a possible devaluation of China's currency, which would have a huge impact on Taiwan.

"Asia's financial crisis was like a boulder dropped into a lake," Lo says. "The financial world was right at the point of impact, while manufacturing industries are spread around the edges."

Concerns about China

Stock markets across Asia slumped yesterday on worries about the weakening Japanese yen and Japan's slump into a recession, along with concerns that China might devalue. The region may be in a renewed downward spiral, economists say, exacerbating a crisis that has already surprised many by its depth.

"Asia has outstripped the more pessimistic views as to what [economic] activity would be like," says economist Donald Hanna at Goldman Sachs in Hong Kong.

On Friday, Japan joined Hong Kong, Malaysia, and Indonesia in announcing that its economy shrank in the first quarter. And China's executive vice premier, Li Lanqing, sent stocks in Hong Kong plummeting yesterday when he said Beijing would be in a "very difficult position if the Japanese yen continues its fall."

* Staff writer Nicole Gaouette in Tokyo contributed to this report.