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Moody's sounds warning on Taiwan as its relations harden with China

MOODY's Investors Service has sounded a warning about Taiwan risk as the mainland's biggest trading partner's relations deteriorate with the Taiwanese refusal to negotiate as part of one country.

Moody's isn't threatening to lower Taiwan's credit rating of "Aa3 stable at the moment, but says silent treatment between the two sides will eventually hurt the export-reliant island's trade.

The rating now, however, is based partly on Taiwan's "competitive economy" in spite of "geopolitical risk related to its relationship with China with periodic tensions," reported Forbes.

Taiwan's trade with China reached a record US$130 billion in 2014 after the governments signed a series of deals since 2008 to ease restrictions on imports and investment.

They reached those deals because Ma Ying-jeou, the former Taiwanese president, had agreed to Beijing's one-China condition, just subject to different ideas on each side about what "China" means.

Sitting Taiwanese President Tsai Ing-wen, who took office May 20, disputes that condition and her resistance is angering the other side's Communist leadership. She advocates rebalancing Taiwan's trade to other countries, particularly in Southeast Asia where Taiwanese investors are exploring investments as manufacturing costs rise in an ever slower-growing China.

Value of imports and exports between the two sides fell to $115 billion last year, but China kept its lead on Taiwan's roster with 22.7 per cent of all trade.

Taiwan risks a decline in trade as its other partners fear offending China by joining hands formally with Taiwan, Moody's believes.

"Uncertainty about the nature of the relationship between Taiwan and China could dampen corporates' willingness to engage in trade and investment," said Moody's vice president Marie Diron.

"Moreover, we think that there is a risk that the effectiveness of Taiwan's diversification policies could be undermined if Taiwan's potential new partners prioritise their relationships with China."

China, which has more than 170 diplomatic allies compared to Taiwan's 22, may use its clout as well to bar Taiwan from membership in regional trade blocs such as the US-led Trans Pacific Partnership or the 16-member, Beijing-backed Regional Comprehensive Economic Partnership.