HONG KONG: Taiwan's exports fell a surprising 41.9 percent, year-on-year, in December, and imports plunged 44.6 percent, resulting in a $1.86 billion trade surplus.

Both contraction rates of more than 40 percent make for the worst results since data started being collected in 1994.

This latest results signal the current downturn will be worse than the last notable recession of 2001, when the worst monthly export and import results recorded 31.6 and 36.5 percent drops, respectively, from the previous year.

Export weakness was broad-based, spanning all of Taiwan's major partners and products. Exports to the mainland and the US (Taiwan's two largest export markets, making up 39 and 12 percent of total export sales, respectively) fell 57.1 and 23.5 percent, year-on-year.

With the global credit market still frozen, we expect major partners' imports from Taiwan to continue declining precipitously, hurting Taiwan's exports, especially in the first half of 2009.

The Central Bank of China (CBC) has slashed the official lending rates by 50 basis points to 1.50 percent. It's the CBC's sixth rate cut since September.

CBC said exports have deteriorated substantially, and the labor market has softened, with rising unemployment and payroll cuts likely to dampen income and consumption, while inflationary pressures have receded significantly.

We anticipate more rate cuts, tax-rate reductions and infrastructure projects as the economy contracts.

Analysis provided by Polaris Securities

(HK Edition 01/15/2009 page1)