Taiwan set for Chinese invasion - of investors

Taiwan’s economy, the world’s 19^th largest, is poised to grow significantly this year as officials open pipelines to new investment from China, capitalizing on an old political foe that has recently agreed to talk business.

Economic planners on the manufacturing-intensive island raised stock market investment caps on certain high-tech firms last month. They said they would later increase the 247 categories of business that are open to Chinese foreign direct investment (FDI), meaning they can pay directly into a Taiwanese company in exchange for a portion of any profits. 

Going a step further, Taiwan’s top China policymaker, Lai Shin-yuan, says the government is studying when to let China’s wealthy investors pursue mergers and acquisitions (M&As). And Chinese investors may one day find it easier to buy real estate in Taiwan, provided they need the property for routine business, not speculation.

The taps are expected to begin flowing from June after the two sides sign agreements offering first-ever legal protections to each other’s investors. The opening marks a major diplomatic embrace for the two rivals, a relationship long seen as a dangerous flashpoint in Asia. 

“The signing of the [accord] will be the first step. After that we will see a progressive lifting of investment caps,” says Wai Ho Leong, regional economist with Barclays Capital in Singapore. “My sense is that this will unlock M&A flows from China into Taiwan and, along with it, also substantial amounts of FDI flows.”

Independence talk dulled trade

Before 2008, presidents in self-ruled Taiwan advocated the island’s formal independence from China, enraging the communist leadership and making trade or investment deals all but impossible. China has claimed sovereignty over Taiwan since the Chinese civil war of the 1940s and wants eventual reunification.

While Taiwan stood its ground, Beijing negotiated trade deals with South Korea and countries in Southeast Asia, hurting Taiwan’s export competitiveness as its rivals got a piece of China’s economy, now No. 2 in the world with a GDP of about $7 trillion.

But Taiwan President Ma Ying-jeou set aside political differences after taking office in 2008 to establish trade, transit, and tourism links with China, ties worth billions of US dollars to the island economy. Mr. Ma was reelected this year with pledges to pick up the momentum.

Growing economic ties also reduce the risk of war, Taiwan's government has argued. As late as 2005, officials in Beijing said they would strike Taiwan if the two sides could not unify through peaceful means. But Beijing has not repeated the threat since Ma took office, signalling a record low in tensions over the past six decades.

“The so-called peace dividend from China will only continue to grow following President Ma’s re-election,” says Chang Ching-I, chief investment officer with HSBC Global Asset Management in Taiwan.

New capital from China would buffer Taiwan’s stock market whenever the island’s exports slow during economic downturns in Europe or the US. Inflows would particularly lift the island’s best firms, in turn raising employment at home and sales overseas. 

Chinese investors stand to get a lot in return. “If [Chinese investors] can plug into HTC or Chimei, that would be a big coup, because they are industry leaders and doing well at this moment,” says Jack Huang, Taipei-based partner in the business law firm Jones Day. HTC makes smartphones and Chimei Innolux does flat panels for televisions screens.

Boon for non-Chinese investors, too?

Today, the European Union is Taiwan’s top foreign investor, followed by the US. Foreign investment totaled about $9.5 billion in 2011, up about 30 percent from 2010. Investors from other countries would find Taiwanese firms all the more attractive if Chinese capital raised their overall values, analysts say.

“There is a whole lot of pent-up capital sitting on the sidelines ready to pounce on Taiwan companies,” says Bill Wiseman, chairman of the American Chamber of Commerce in Taipei. “The companies here are extremely profitable, and frankly a lot of them are undervalued.”

In that vein, US rating company Business Environment Risk Intelligence (BERI) found in December that Taiwan's investment environment ranked third in the world, Taiwan’s nonprofit institute the National Policy Foundation said.

A BERI score of 73 put Taiwan in the same spot as Norway and behind only Singapore, in first place, and Switzerland, the foundation said in a statement. BERI measures risks related to government policy, currency exchange rates, and doing business in general.

Financial risk will remain low in Taiwan as long as China does well, allowing the island to pull away from reliance on more volatile export markets such as Europe and the US, says Tony Phoo, economist with Standard Chartered in Taipei. Frenzied infrastructure spending also makes the island more attractive to investment.

“The health of the Chinese economy is going to have increasing impact or role,” Mr. Phoo says. China isn’t slipping now, but it could. “For Taiwan to open up and be attractive to foreign investors is a positive, but that brings about a need to manage risk.”

China kept from defense sector

Chinese investment also increases the island's exposure to Chinese political influences. Beijing hopes economic sweeteners will eventually lure Taiwanese voters toward political unification, experts say.

“If China’s direct investment becomes too much, the problem becomes how to evaluate possible interests and challenges,” warns George Tsai, a political scientist at Chinese Cultural University in Taipei.

Taiwanese officials say they will protect the island’s most sensitive sectors, such as defense and prized high-tech items, as they add new direct investment categories. Stock market investors from China will also be barred from buying majority shares, though the economic affairs ministry said they eventually will be allowed investments above the current 10 percent cap on a case-by-case basis.

Mainland Chinese have invested $170 million in Taiwan to date. Taiwanese investors have already parked some $150 billion in China due to earlier liberalization. Taiwan and China are talking separately about dropping import tariffs on 11,000 items, says Phoo.

Taiwanese businesses are already seeing returns. Taipei-based Evergreen Marine, the world’s fourth-largest marine shipper, expects volumes to grow 3 to 4 percent through 2020.

“Looking ahead, though currently the world economy is slowing down mainly due to uncertainties in Europe and US markets, the emerging markets led by China and its surrounding neighbors are still relatively energetic in supporting trade activities,” company President C.J. Wang said in an e-mail interview.