Vice President Lai Ching-te won the presidency on Saturday, the third consecutive term for his ruling Democratic Progressive Party (DPP), but the party lost its parliamentary majority, complicating Lai’s spending plans and any intent to take an aggressive stance on China.
China, which claims Taiwan as its territory, had called Lai a separatist and “troublemaker through and through”, but took a gentler tone after the election, not mentioning him by name and saying the results revealed the DPP “cannot represent the mainstream public opinion” on Taiwan.
Analysts expect Taiwan’s stock market to take a hit this week as the spectre of policy paralysis fuels selling in a market that is up 25% in little more than a year.
Yet the outcome is also a relief for investors who had feared the hawkish Lai would push for Taiwan’s formal independence, something he has denied. Investors have worried about a hostile reaction from China and a chain reaction of sanctions that could cripple the global semiconductor industry.
“I would imagine the reaction is negative. The market could read weak government in Taiwan, lots of external risks from the mainland and lots of internal risks, because there is no control of the legislature,” said Alicia Garcia Herrero, chief economist Asia-Pacific at French investment bank Natixis in Hong Kong.
But Herrero’s says Lai’s “balanced” victory speech and the stalemate in parliament are reasons China may not react. “If China does nothing, maybe the market will read it is not a big deal and might remain positive,” she said.
While investors expect some knee-jerk selling of Taiwan stocks and even the currency this week, it is likely market participants will sit tight until the new government takes office.
Parliament will open on Feb. 1 and Lai’s Cabinet will take office on May 20.
Aninda Mitra, head of Asia macro and investment strategy at BNY Mellon Investment Management, expects heated political rhetoric and other short-term ructions as Taiwan politicians and their Chinese and U.S. counterparts trade jabs in the coming days.
“On the macro, geopolitical side I don’t think there will be huge ripples from a global perspective,” said Vishnu Varathan, chief economist, Asia ex-Japan at Mizuho Bank in Singapore.
But the DPP’s loss of a parliamentary majority was a bigger issue, he said. “The Taiwan dollar might take a little bit of a knock on the greater potential for stalemate.”
In the weeks ahead, investors will get a better sense of how much support Lai will get from parliament, where his DPP won 51 seats to the opposition Kuomintang’s 52 and the Taiwan People’s Party’s eight.
WHAT CHINA DOES
China’s reaction remains the wild card for global markets.
Beijing on Saturday pointed out most electors voted against Lai. Lai, meanwhile, kept it vague, saying there was need for cooperation but that he was “determined to safeguard Taiwan from threats and intimidation from China”.
The stakes are high for global markets, given expectations the United States would support Taiwan if Chinese were to invade.
Taiwan produces 60% of the world’s semiconductors, used in everything from smartphones and fighter jets, and 90% of the most advanced chips. Economic sanctions on Taiwan could cripple the global technology and artificial intelligence sectors.
Its biggest company, Taiwan Semiconductor Manufacturing Co , has often found itself in the cross-hairs of geopolitical tensions and trade sanctions. Shares of TSMC, Asia’s most valuable listed company, surged 32% in 2023.
“From here on what will need a lot more assessment are the strategic policies of the incoming Taiwanese government and their internal cohesion,” said Mitra.
“Will they try to balance their relationship with China and the U.S. or pull away from one or the other? It remains too soon to definitively answer these questions right now.”
