turning-point-for-taiwans-relations-with-china

Turning point for Taiwan's relations with China

Expect Taiwan to forge closer ties with China now that Ma Ying-jeou is president û and that should lead to an economic boom.
Many Taiwanese have long felt they have missed out on the benefits of ChinaÆs economic boom even though the mainland is TaiwanÆs biggest trading partner. But now that Ma Ying-jeou has been elected president there is considerable optimism that a turning point has been reached, since he favours easing tensions with China. If all goes well, that should spur a recovery for TaiwanÆs lagging economy.

ôItÆs great news for us and will lead to a change in cross-strait relations,ö says Susie Chiang chairman of the CS Culture Foundation, a private sector think-tank based in Hong Kong. ôMa is promoting a more open-door policy towards China, which will lead to better business relations. This is why everyone is so optimistic.ö

Taiwan and China have been ruled separately since 1949 when the Chinese Communist Party took control in China and Chiang Kai-shekÆs Kuomintang government fled to the island. After 55 years of rule by the Kuomintang, TaiwanÆs first presidential election was held in 1996 followed by the first parliamentary elections in 2000, which Chen Shui-bianÆs party handily won.

Over the past eight years, under Chen Shui-bianÆs presidency, cross-strait relations were uneasy and often acrimonious. ChenÆs pro-independence Democratic Progressive PartyÆs (DPP) position has irked the US, TaiwanÆs staunchest ally, and China, which claims sovereignty over the island. Indeed, China has threatened to invade Taiwan if it attempts to formalise independence. ChenÆs obsession with the Taiwanese identity issue, analysts say, led to the neglect of the economy, although he also had to contend with a legislature that was dominated by the Kuomintang, which fought both him and his reform efforts.

Although TaiwanÆs technology sector has flourished and maintained its market dominance, manufacturers have moved to their production to China and domestic investment has declined. Taiwanese manufacturers have invested roughly $300 billion in the mainland during the past 15 years, which makes Taiwan one of the largest sources of foreign direct investment in China. During the same time, funds that have gone offshore in search of higher yields outside of Taiwan have not returned to the island.

While the headline number still looks good û TaiwanÆs economy grew 5.7% in 2007 û household incomes are at a record low level having only risen a miserly 3.5% since 2000 and property prices have been flat. Indeed, TaiwanÆs property prices have consistently underperformed those in other Asian economies since the early 1990s.

Missed opportunities
The Taiwanese blame uneasy cross-strait relations for the weak economy. In an attempt to prevent Taiwan from becoming overly dependent on the mainland, Taiwan has imposed restrictions, which have unintentionally backfired on the economy.

Grace Ng, an economist with JPMorgan, points out that although companiesÆ investments in the mainland have been restricted to 40% of their capital, this has not deterred mainland investment. But it has discouraged the repatriation of profits since manufacturers worry that they may not be able to use the funds for further expansion in China. At the same time, companies that want to raise money to expand in China have been reluctant to list in Taiwan. Many prefer Hong Kong or Singapore.

Individual investors wanting to invest in the China story have also had to move offshore since the government has forbidden the sale of mutual funds in Taiwan that invest more than a small portion of the funds in mainland companies. While other Asian companies have benefited from the huge outflow of Chinese tourists, Taiwan has the lowest number of tourist arrivals in East Asia. It has only recently permitted entry to mainland package tours. And it bans direct transport links with China for security reasons. This means that a trip between Taipei and Shanghai that should take an hour, takes nearly a full work day since travellers have to pass through Hong Kong or other third countries.

New beginnings
After lagging most stock markets over the past few years, TaiwanÆs bourse has been the best performing in the region this year, rising 8% while most others are down by more than 10%. Although China has not commented on the election result, it has indicated that it is prepared to talk to anyone not actively seeking formal independence for Taiwan.

Ma, who will not formally assume office until May 20, said during the campaign that weekend charter flights to China would be in place by July and he proposed making it easier for mainland tourists to visit Taiwan. He is also proposing to eliminate the 40% investment rule cap into China while permitting mainland investments into Taiwan.

ôIf these four things happen, there will be a massive economic boom particularly in Taipei,ö says Peter Sutton, head of research for CLSA in Taipei.

He adds that closer links will see the development of Taipei as a service centre for Greater China, as many of the 2 million Taiwanese currently living in mainland cities would likely return to live in Taiwan as a result of the resumption of direct flights. At the same time, closer links could lead to significant corporate investment in Taiwan. There is also likely to be a jump in private consumption spending ôas consumer sentiment and overall confidence on the medium-term outlook for the economy gradually recovers,ö says JPMorganÆs Ng.

The consensus among economists for gross domestic product growth in 2008 is 4.3%. However, UBS is more circumspect and is forecasting growth of 3.5% due to slowing world demand, which it says will impact domestic consumption.

ôWe donÆt expect the presidential election to have a major impact on the domestic economy in 2008. While a more mainland-friendly government may boost investor sentiment and perhaps increase mainland tourist flows, concrete agreements with Beijing that will increase economic growth significantly will take longer to materialise than 2008,ö says Sean Yakota, an economist with UBS.

The economy was the central issue in the election with DPP candidate Frank Hsieh adopting a more pragmatic attitude than President Chen. Both Ma and Hsieh favoured relaxing cross-strait economic links although they differed on the speed and degree of opening up relations. Yet, the shift in Taiwan public opinion, a trend accelerated by President Chen, has meant that no Taiwanese politician can now hope to get elected by declaring himself in favour of reunification with China.

For many years this has been the formal position of MaÆs Kuomintang party, though in the months preceding the election Ma backed away from this position. He said he was against reunification, but also against a formal declaration of independence. Ma has also sought to differentiate himself from the old-style Kuomintang political machine by criticising ChinaÆs human rights record and promising to fight corruption. He has condemned ChinaÆs recent crackdown in Tibet and has even threatened to boycott the Beijing Olympics because of the issue.

So where does this leave ChinaÆs long-held quest for TaiwanÆs reunification? ôFor the moment people are focusing on economic ties with China. We are not talking about reunification at the moment. There is a long way to go before we can talk about that,ö says Susie Chiang.

This story was originally published in the April issue of FinanceAsia magazine.
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