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Taiwan Looks to China for Massive Economic Boost

Ralph Jennings

In Taiwan, the reelection of a president known for easing tension with longtime rival China means a new plunge into economic talks with Beijing. While Taiwan still shies away from confronting its thorny political issues with China, both are embracing new financial and trade deals that will give China a huge role in Taiwan's economy. Those investments could play a key role for an economy that is struggling to compete against its industrialized Asian peers.

Ma Ying-jeou

Taiwan President Ma Ying-jeou made major moves to ease tensions with China during his first term and following his re-election in January, Taipei and Beijing pledge to forge ahead with new business deals in the coming years.

The president's near-term agenda calls for lower tariffs on thousands of import items, relaxed rules for mainland Chinese investors in Taiwan and new legal protection for their interests.

Wai Ho Leong, a regional economist with Barclays Capital, sees major movement following investment protection deals that Taiwan expects to be signed by July.

“We’ve had people flows to date, the easing of trade restrictions on both sides, we’ve had cultural dialogue on both sides," said Wai Ho. "The fourth dimension that’s missing currently is capital flows, and I think investment protection act will be a strong catalyst in driving investment flows into Taiwan from China.”

Investments

The investment protection deals will provide guidelines to settle legal disputes between businessmen on the two sides. That should give mainland Chinese firms, some of the world’s wealthiest today, more confidence to buy shares of listed Taiwanese firms. Economists believe Taiwan wants to give China a bigger role; already it permits mainland Chinese to purchase up to 10 percent of a Taiwan company without applying to the government.

Taiwan is expected to let China make larger direct investments in the 247 sectors that are now open to it, and perhaps expand the list. Since 2009, official figures show that mainland Chinese have invested the equivalent of $170 million in Taiwan in various forms. Leong says Chinese companies will eventually acquire outright control of Taiwan firms.

“The lifting of the investment caps that is currently about 10 percent for most of the industries could be raised to a more substantial level, and I think this paves way for actual M&A [mergers and acquisition] to come in from China,” said Leong.

Mergers and acquisitions

Today Taiwan rigorously reviews bids from China for high-value mergers and acquisitions, especially in volatile or politically sensitive industries. The island’s top China policy architect, Lai Shin-yuan, says government agencies in Taipei are studying ways to relax the rules, but not to expect a quick decision.

She says her government regularly examines the rules for Chinese investors and that when conditions are mature, private equity barriers may ease little by little.She would not estimate when that maturity would come, but says capital is not a problem now. She adds that entrepreneurs are looking more for new markets, stronger branding and technology upgrades.

Over the next year or two, China and Taiwan also aim to cut import tariffs on about 11,000 items in a deal favoring Taiwanese exporters, who are the lifeblood of the island’s $425-billion economy. An initial 800 tariffs were slashed last year.

Conflict

China has claimed self-ruled Taiwan as part of its territory since the Chinese civil war of the 1940s. The resulting chill in relations stood in the way of the type of trade deals common between Beijing and Taiwan’s export-dependent rivals such as South Korea and the Association of Southeast Asian Nations. But as Taiwanese were long allowed to invest in China, two-way trade had surpassed $100 billion per year before 2008.

That year, as ties with the Chinese economy became crucial to Taiwan’s competitiveness, President Ma dropped his predecessor's tough rhetoric and began looking for deals. His government and Beijing have signed 16 agreements removing previous restrictions on investment, tourism and direct flights. Those accords have brought billions of dollars to Taiwan’s economy.

Economy

The boost from China came just in time to cushion Taiwan from the 2008 world financial crisis and a mid-2011 global stock slump. Taiwan’s biggest firms depend largely on world consumer appetite for high-tech gadgets and machine tools.

Beijing, meanwhile, welcomes the economic and trade dialogue as a way to set the stage for what it hopes will be eventual political reunification. It is also looking out for the returns of its investors such as banks and airlines, analysts believe. George Tsai, a political scientist at Chinese Cultural University in Taipei, says Taiwan will be on alert for any mainland Chinese over-investment that could hurt its bargaining position if the two sides later discuss political issues.

“Of course China wants to woo Taiwan back to its embrace. In the long run of course the people are concerned with the China threat," he said. "If China’s direct investment becomes too much, the problem becomes how to evaluate possible interests and challenges.”

After weighing those interests and challenges in the coming months, top negotiators are scheduled to meet by the end of June with an eye toward completing new agreements.

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