It's no fluke that, from a low point in January before voters in Taiwan reelected President Ma Ying-jeou through April 20, the island's stock exchange rose 8%. Ma's election to a second term will, by most accounts, give new momentum to trade and investment ties between Taiwan and mainland China, an economic giant and erstwhile political foe that had once been kept out of the island's economy.
As a result of further partnerships anticipated before the end of Ma's term in 2016, investors from mainland China are expected to dig deep enough into Taiwan to send tremors throughout the economy, which is driven by exports but hobbled by stagnant wages and tough competition from the island's emerging Asian peers. Analysts forecast major mainland Chinese inflows into the stocks of listed firms, foreign direct investment (FDI) in local projects and, ultimately, mergers and acquisitions of Taiwanese firms by mainland counterparts. The Taiwanese government has not ruled out a relaxation of M&A rules or lighter restrictions on mainland Chinese investment in the island's fast-appreciating real estate market, moves that would potentially lead to even more economic activity.
Before Ma took office in 2008, his predecessors in Taipei had outraged Beijing, which has claimed sovereignty over the self-ruled island since the Chinese civil war of the 1940s, by advocating constitutional independence from China. Ma offered to shelve more than 60 years of such political disputes to discuss trade and transit links with Beijing. During his first term, more than 800 import tariffs were curbed, and more than three million mainland Chinese tourists visited Taiwan — up from just a trickle before — and there was the addition of more than 558 direct flights between the two each week. Those agreements brought billions of U.S. dollars to the Taiwanese economy.
Under Ma's first four years, "we've had [an increase in] people flows, we've had the easing of trade restrictions … and we've had cultural dialogue on both sides," notes Wai Ho Leong, a regional economist with Barclays Capital. "The fourth dimension that's missing currently is capital flows." The two sides say they expect new waves of investment after the end of June, following the signing of agreements that extend legal guarantees to investors from one side with interests on the other — particularly important in the absence of formal diplomatic relations. Without an agreement, China fears that a shift in Taiwan to an anti-Beijing opposition party leadership could chill political ties again and threaten existing investments, experts point out.
The Taiwanese want the same sort of pact to guard against trademark piracy and legal disputes in the mainland, where 750,000 to one million people from the island already live for business purposes, havingparked a conservative estimate of US$150 billion in China.
Opening Up
Officials in Taiwan say that when the time is right, they will unilaterally raise caps on amounts that mainland Chinese can invest in local stocks and FDI, the latter meaning direct purchases of local firms but falling short of allowing outright mergers or acquisitions. The number of business types open to FDI may be raised from today's total of 247, which are largely related to banks, services and manufacturing. Caps would vary from one type of business to the next. Officials are scheduled to meet at the middle and end of the year to discuss expanding the list.
Economic Affairs Minister Shih Yen-shiang told a legislative committee in March that Taiwan planned to open to FDI another 115 types of manufacturing businesses, 23 service-related lines of business and 23 in public infrastructure construction.
That expansion would give mainland investors access to 97% of Taiwan's manufacturing sector, 51% of the service sector and 51% of the public infrastructure construction industry.
Taiwan began opening to investments in June 2009 with a first wave of 192 business categories. Today, the list covers banking, securities, futures, manufacturing and much of the service sector. FDI applications would still need government approval, but a spokesman with Taiwan's economic affairs ministry said small-value requests are likely to be processed quickly. Taiwanese officials have said they would spare opening politically sensitive industries, such as defense or its top IT sectors, which give the island a long-term competitive advantage in the global tech supply chain, including lucrative contacts with Apple.
On the stock market side, mainland qualified investors today can buy up to 10% of a Taiwanese firm's shares without special government permission. Taiwan's government in March raised caps for mainland investors in the stocks of liquid crystal displays and semiconductors, still subject to review by the island's regulators. Investors in those sectors will be able to buy more than the usual limit of 10%, but short of a controlling stake.
The impact on LCD and semiconductor stocks is uncertain, notes Fang Wen-yen, an economist with KGI Securities in Taipei, as some of the affected companies may be "niche" only. Mainland FDI investors will see "strategic" returns on FDI, she adds.
But other economists expect that money from the other side will help Taiwanese investors start projects at home, stimulating the overall economy. That stimulus would raise asset prices and improve job prospects for Taiwanese who have complained of flat wages and job search difficulties since before 2008.
Chinese shipper COSCO, for example, is considering an investment in a container terminal at southern Taiwan's Port of Kaohsiung, according to the industry journal Port Technology International. Yang Ming Marine, Taiwan's second-largest marine shipper, said last year it had received separate offers from the state-owned COSCO for a 40% stake in a US$659 million terminal, the journal noted. Taiwan's government must approve regulations on infrastructure projects involving mainland investment before the deal goes through. "COSCO has said they want to invest, we know that, but we're not sure how much of a stake they would take," the Taiwanese shipper's spokesman, Bruce Tseng, says.
"Over five to 10 years, Chinese money will find it easier to come into Taiwan," adds John Brebeck, a Taipei-based financial analyst and former research head at Yuanta Investment Consulting in the island's capital. "Letting Chinese investment in is a good way to improve valuations."Mainland Chinese have invested the equivalent of US$170 million in Taiwan in various forms to date, the economic affairs ministry reported in March. Investment caps "could be raised to a more substantial level, and I think this paves the way for actual M&A to come in from China," Leong notes.
Further raising the value of Taiwanese company assets, the two sides expect to open talks this year on a new accord that would cut import tariffs. Following from the Economic Cooperation Framework Agreement that took effect last year and slashed the first 800 tariffs, negotiators are expected to approve cuts on 6,000 more items shipped to the mainland and 5,000 mainland exports bound for Taiwan, according to Tony Phoo, a regional economist with Standard Chartered in Taipei. Lower tariffs for Taiwanese exporters would save them money, raising stock prices. "Tax savings would attract investment, and it would be more on the equity side," Phoo says. Adding to the appeal of Taiwan's assets, "the economy is relatively safe, and because of problems in Europe, debt papers in Taiwan look good."
Taiwanese officials won't say what they will open or when, but they have made it clear that they want Taiwan's growing US$425 billion economy to get more involved with China's US$7 trillion economy so Taiwan reaches the level of its export-reliant peers such as South Korea and the Association of Southeast Asian Nations (ASEAN).
Before 2008, Taiwanese leaders had blocked most trade, investment and economic partnership with the mainland, fearing that the tie-ups would give Beijing a toehold leading to an eventual political takeover. That freeze gave Taiwan's exporter rivals a head start in signing trade pacts with China. Beijing has embraced the post-2008 overtures as it sees them as a warm-up to eventual reunification, analysts note.
"Of course China wants to woo Taiwan back into its embrace," says George Tsai, a political scientist at Chinese Cultural University in Taipei. "In the long run, of course the people [in Taiwan] are concerned with the China threat. If China's direct investment becomes too much, the problem becomes how to evaluate possible interests and challenges."
'Plugging In' to Industry Leaders
Separately, mainland firms will be keen to get stakes in Taiwan's more profitable companies as they pay lower tariffs and watch revenues grow from global sales of smartphones or ultrabooks made by Taiwanese PC giants such as Acer and Asustek — both are looking to advance their brands after decades of lower-profile contract work."Taiwan sectors such as high-tech, IC [integrated circuits] and machinery precision equipment can be profitable for mainland investors," according to Jack Huang, partner with the Jones Day law firm in Taipei. "If [investors] can plug into HTC or Chimei LCD or BenQ, that would be a big coup, because they are industry leaders and doing well at this moment. American and Euro companies, if they could, would jump in, too." BenQ makes digital cameras, projectors and camcorders, while Chimei Innolux manufactures flat panels and HTC has a world brand following for smartphones. All three are headquartered in Taiwan.
Taiwan is also studying whether to open its markets to real estate and merger and acquisition bids from mainland firms, the island government's chief China policymaker Lai Shin-Yuan said during an interview in November. Both sectors are all but off limits today, though mainland firms can buy property through third parties.
But the timing of that unilateral decision depends on market "maturity" and actual need among Taiwanese business people, Lai noted. Nothing is expected any time soon. "We regularly examine the rules for Chinese investors and when conditions are actually mature, private equity barriers may ease little by little," Lai said. "Capital is not a problem now for entrepreneurs. They're looking more for new markets, stronger branding and technology upgrades."
However, C.Y. Huang, chairman of the 100-member Taiwan Mergers & Acquisitions and Private Equity Council, charged at a news conference last year that the government remains afraid of private investment from anywhere offshore that might hurt local minority shareholders or cause a backlash in the media.
Huang noted that Taiwanese regulators had nixed a bid in 2011 by U.S.-based Kohlberg Kravis Roberts to privatize Taiwanese electronics parts maker Yageo. In 2010, regulators also blocked a Hong Kong-based consortium's proposal to buy the American Insurance Group's (AIG) Taiwan arm, Nan Shan Life, a deal widely speculated to involve financial backing from mainland China.
Real estate is just as thorny, observers say. Land values in Taiwan went up an average of 8.65% in 2011 compared to a year earlier, and the government has approved a new property tax that year following adjustments in lending rates to keep prices in check. Lai said the government would stop mainland Chinese "speculators" from entering the market but did not rule out opening property to mainland buyers with other aims.
Property prices on the island will still rise 20% over the next two years, followed by an average increase in the price of financial assets at 10%, Barclays Capital estimates. It forecasts a Taiwan stock market volume of 8,800 by year's end.
Investors aren't showing their cards yet, saying in some cases that they want to see exactly what happens between the two sides of the Strait. Taiwan's Cathay Life is applying to the island government for permission to invest in China, but the insurer, which has US$33.95 billion worth of assets and 7 million members, would not say how it would proceed if approved. The Taiwanese government's Bureau of Labor Insurance declined to say how much of its US$15.19 billion worth of assets are in China but calls China just another emerging market.
Offshore investors usually lump Taiwan with other newly industrialized Asian economies such as South Korea, Hong Kong and members of the ASEAN. "The fact that China's and Taiwan's performances are in tandem with that of Asia could be interpreted as people see China and Taiwan as an integrated part of the Asian emerging markets, rather than separately," notes Chang Ching-i, chief investment officer with HSBC Global Asset Management in Taipei.
One concern from investors offshore is Taiwan's currency, which has risen since Ma's reelection on January 14 and would push stock prices up. "We're mindful of the exchange rate movement in equities at the moment," says Ian Tarutia, chief executive officer with the National Provident Fund of Papua New Guinea, a scheme with assets of US$1.13 billion. "There are more opportunities locally within the PNG market that are making that more attractive."
But other types of business see prospects for more Taiwan-mainland investment as one sign in a trend of longer-term economic growth for Taiwan. "We do believe that given Taiwan's competitive advantages and its position in the region and in some key industries, the medium and longer term prospects for the economy are positive," the 700-member European Chamber of Commerce Taipei said in a statement in late March.
