Taiwan stocks close at seven-year low

By CNN's Alex Frew McMillan

TAIPEI, Taiwan -- Taiwan's market slumped to a seven-year low Friday as its business outlook got increasingly gloomy.

Taipei's benchmark Taiex turned sharply down, losing 3.2 percent. Its close at 4,485.68 was its worst since December 1, 1993.

The latest blow came as the island's top think tank cut its forecast by more than half. The Academia Sinica cut its forecast for 2001 to 2.4 percent, from 5.2 percent.

Other experts think the country will be lucky to achieve that.

"Fundamentally, I think there's still no good news and the outlook is still gloomy," said Frank Gong, an economist at Bank of America.

Gong thinks Taiwan is already technically in a recession. "If they can get 2 percent growth year on year, it will be a good number," he said.

Exports slumping

Typhoon Trami has been buffeting Taiwan, the third typhoon to hit the island in less than a month. Local media report five deaths from flooding in Kaohsiung, Taiwan's second-biggest city.

This has been an equally dismal month for the country's industry. The worldwide slowdown in technology spending has hit Taiwan's chip-driven economy hard.

Earlier this week, Taiwan posted its worst export numbers since tracking started in 1976. June sales of Taiwanese goods abroad thudded 16.6 percent lower.

Some of its top companies such as chip foundries Taiwan Semiconductor Manufacturing Co. and United Microelectronics Corp. get over half their sales in the United States.

They are also the biggest stocks on the Taipei exchange.

In fact, technology stocks account for 52 percent of its stock market, according to trading house Morgan Stanley. They account for 24 percent of Taiwan's entire production.

Deep-rooted problems

America isn't buying. Another key trading partner, Japan, is in a recession.

But Taiwan faces deep-rooted structural problems as well. Its banks are carrying a large amount of bad loans.

Taiwan's industry is also running to mainland China, to take advantage of cheap labor there. Because its banks haven't been able to follow, they have been left serving old-line companies with slower growth.

Taiwan's government recently said it would let its banks set up China branches. It is considering easing the cap it sets on the amount companies can invest in China.

But critics say those are piecemeal steps. Taiwan stands to lose out when China enters the World Trade Organization, experts say, with Taiwan's entry expected to follow.

Freer links would likely speed up the "hollowing out" of Taiwan's companies heading to the mainland.

The opposition Nationalist Party is considering using reunification as a platform in the runup to Taiwan's elections on December 1.

Taiwan's stock market is unlikely to rally until there's a return in U.S. prospects, market watchers say.

But in the long run, some feel it needs to smooth its relationship with mainland China, which regards it as a renegade province.

"The globalization process is inevitable," Gong said. "You just want to see some sort of progress on the structural problems or it just won't go anywhere."

Reuters contributed to this report.