Exuberance in Taiwan as Ties With China Warm New York Times, May 13, 2009
TAIPEI — The bulls are running hard in Taiwan as the island prepares to open its doors to mainland Chinese investment for the first time since breaking from Beijing in 1949.
After the two sides announced plans late last month to sign accords on banking, insurance and access to financial markets, mainland fever has set in on the island: its benchmark stock index, the Taiex, climbed 13 percent in the two weeks to Friday, and some analysts are predicting an additional gain of 25 percent to 50 percent by year-end. The Taiwan dollar has strengthened 2.5 percent.
Optimists see decades of bitter rivalry across the Taiwan Strait fading. The British bank Standard Chartered has dubbed the opening a “great leap across the strait,” and Goldman Sachs has called it a “paradigm shift.”
But others here are cautioning that the opening to mainland money could take longer than expected — and that in the near future at least, mainland investors will face a daunting maze of regulatory approvals and political concerns.
“People are overoptimistic,” said Norman Yin, a finance expert and informal economic adviser to Taiwan’s president. “They don’t understand that there are many constraints in the first stage. And in sensitive sectors, such as high-tech, military-related or mobile phones, there will be even more restrictions.”
Beijing officials have viewed Taiwan as a renegade province ever since the Nationalists retreated to the island when they lost the Chinese Civil War to the Communists 60 years ago. Though not formally independent, the island has had its own government, economy and currency.
For most of this decade, Taiwan was led by a pro-independence government that increased some cross-strait ties, although not nearly as quickly or broadly as business interests and investors would have liked.
But since Ma Ying-jeou was inaugurated as president nearly a year ago, Taiwan has moved rapidly to forge closer commercial links with China to lift its sagging economy. In the past year, it signed deals with China on tourism, airline flights and shipping.
Investment, however, has remained a one-way street, flowing from the island to the mainland. Taiwan has invested $150 billion in the mainland since the 1980s, according to one Taiwan government estimate. Mainland China has until now been barred from directly investing in Taiwan.
Now, analysts are heralding the long-term financial implications of Taiwan’s opening to the mainland. The anticipation began on April 26, when officials from Taipei and Beijing met in the mainland city of Nanjing and signed a statement on financial cooperation.
Three days later, Taiwan said it would allow mainland investment in nearly 100 sectors. Taipei also said it would permit mainland investment in construction projects that are part of Mr. Ma’s economic stimulus package. The same day, the first possible deal was announced. China Mobile, which has the most subscribers of any mobile phone carrier, said it had agreed to take a 12 percent stake in Far EasTone Telecommunications of Taiwan.
On May 1, China formally approved Taiwan-bound investment by qualified domestic institutional investors. Four days later, it announced a plan to step up development of a cross-strait economic zone in Fujian Province. Taiwanese auto, banking and other companies added to the euphoria by announcing investment tie-up plans with mainland companies.
The response to all this has been a stock market frenzy, especially by foreign institutional investors. JPMorgan Chase announced a target of 8,000 for the Taiex by year-end (the Taiex closed at 6,485 on Wednesday).
Goldman Sachs upgraded Taiwan shares in general to “overweight” this month. “The rapidity and scope of recent cross-strait initiatives,” it said in a note, “are welcome signals that Taiwan may finally reap the economic benefits from a warmer relationship with China.”
But many investors seem to have glossed over or willfully ignored the fact that many essential details remain unresolved or undisclosed. For one, the details of which specific sectors will be open to mainland money have not been completed.
Taiwan will most likely allow mainland investment in 98 industries during the first phase, including automobiles, textiles, rubber and retailing, with detailed rules probably coming at month-end, the Taiwan minister of economic affairs, Yiin Chii-ming told reporters this week. But flat-panel and contract-chip manufacturing will still be shut to mainland investors for now.
Then, the two sides will have to sign a memorandum of understanding, probably in June or July for stock investments, as well as separate agreements for banking and insurance.
“On the Taiwan side, the government is still keeping their cards close to their chest,” said Tony Phoo, an economist with Standard Chartered. “We still don’t have details on everything we’re hearing and reading about, so there’s a lot of market speculation.”
Kevin Yang, chief investment officer at Paradigm Asset Management, added that for now, Beijing was capping Taiwan-bound investment at about 7.2 billion Taiwan dollars, or about $219 million.
“That’s very little,” he said. “I think the market’s overreacting.”
Phil Chu of Grand Cathay Securities and other analysts say foreign investors are betting that Taiwan will be another Hong Kong, where the stock market boomed following its opening to mainland investment. “I think it’s possible Taiwan’s stock market could double by 2012,” Mr. Chu said. “But it won’t go up as much as Hong Kong’s did.”
Still, analysts see Taiwan’s opening to the mainland as helping the island’s economic recovery in the short-term, and providing a structural boost in the long-run. China has already played a part in lifting some sectors. Its rural stimulus plan has increased mainland demand for televisions and other appliances, which has increased orders for Taiwan’s high technology companies.
Investors in Taiwan’s market have been burned before on inflated mainland hopes. Last year, for example, the market rocketed in the two months before Mr. Ma’s inauguration, only to plunge steadily afterward as the reality of the global downturn set in. Still, analysts insist that the long-term picture is bright.
“For eight years, Taiwan kept limits on exchanges and investments,” Mr. Chu said. “But since last year, Ma Ying-jeou has steadily adopted opening policies.”
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