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Just last week - for the first time in 60 years - Taiwan opened its doors to investments from Mainland China.
The impact was almost immediate.
On Friday, Guangzhou-based China Southern Airlines Ltd. (NYSE ADR: ZNH) submitted the first bid under
the new regulations and became the first mainland company to apply to invest in Taiwan. By the day's end,
three more of China's air carriers had joined the race and filed applications to invest in Taiwan: Air China
Ltd. (OTC ADR: AIRYY), China Eastern Airlines Corp. Ltd. (NYSE ADR: CEA) and Hainan Airlines Co. Ltd.
Clearly, these companies understand the stakes here, which is what's behind the rush for these potentially
lucrative new routes between Taiwan and China. Speaking for China Southern, spokeswoman Zeng
Qingning noted in the Taiwan News "we can begin selling tickets once our office is approved to become a
branch." My experience suggests that other companies are well advanced in their preparations too, which
is why this probably isn't the last we'll hear on this topic.
One-Way Street
Just last Tuesday, Taiwan's Ministry of Economic Affairs (MOEA) announced that China-based companies
and investors would be permitted to invest in more than 100 different product-and-service categories, and
that regulations governing applications by China-based companies seeking to open branches or
subsidiaries in Taiwan also were ready. These initiatives were an outgrowth of several new investment
accords reached in May between the Association for Relations Across the Taiwan Straits (ARATS) and the
Straits Exchange Foundation (SEF). When I reported on these at the time, I told Money Morning readers
that they literally were watching history in the making just as I was from my perch in China as the news
unfolded. Prior to last week, "cross-strait" investments had been a one-way street - from an official
standpoint, at least - with Taiwan companies having invested hundreds of billions of dollars in Mainland
China, including about $77 billion since just the late 1990s alone, The Wall Street Journal Asia reported.
In return, China's been allowed absolutely zilch and has been legally barred from making investments in
Taiwan. The fear - at least what's been stated publicly - is that China would use its rapidly expanding
economic might to blunt Taiwan's efforts to remain an independent nation. (You may recall from your
history books that China views Taiwan - formerly known as Formosa - as a "breakaway republic," a
position the island nation has held since 1949, when the two split during a civil war that led to the creation
of the communist-controlled People's Republic of China.)
China's Newfound Role as an Economic Savior
Behind the scenes, however, the story is much different. Many Taiwanese business leaders I've spoken
with confidentially welcome normalized relations and view the opening process as a development that's
long overdue. For them, it's not about political aspirations; it's about what China can do for their
over-leveraged, underutilized assets. Many, including new Taiwan President Ma Ying-jeou, for example,
are acutely aware of the fact that Taiwan missed out on many of the benefits of China's rapid
industrialization and global emergence over the past 10 years, thanks to poor political relations and
antagonistic regulation.
And it's cost Taiwan dearly. The desire for continued independence aside, once-proud Taiwan has
become another in a long list of nations around the world that are eating big slices of humble pie and that
now see China as a potential savior from the current global financial crisis.
Taiwan's experience with the Taipei 101 Tower is a concrete example of the potential benefit of China's
emerging economic might. The tower was supposed to stand as a symbol of Taiwan's newfound economic
prowess and, at the time of its construction, was the world's tallest building.
But it soon became a colossal white elephant. In fact, until very recently, it stood less than 50% occupied.
That's when several of China's corporate powerhouses took up residence, including:
* Lenovo Group Ltd. (OTC ADR: LNVGY), the growing global PC giant.
* Sinosteel Corp., the major iron-ore importer.
* And Tiens Group Co., a China-based direct-selling conglomerate that is the world's fifth-largest
healthcare products firm.
According to The Wall Street Journal, the building is now more than 80% occupied and rents in the area
have risen by 5% to 10% in anticipation of more highbrow Chinese clients. Of course, it doesn't hurt to
have such big-name players as Bank of America (NYSE: BAC), Google Inc. (Nasdaq: GOOG) and even
Merrill Lynch (NYSE: SAR) as tenants, but the reality is that the Mainland China companies are the firms
that are really being sought right now. That's particularly true at a time when the mainland economy
remains on track for annual growth of 8% or more this year, and appears to be the only one of the world's
top industrialized economies that's not in a deep state of denial or contraction or both.
The fact that China's bucking the trend is not lost on the Taiwanese business community. Nor is the fact
that many of the best-positioned and fastest-growing Mainland China companies are state-owned
enterprises.
"In contrast to the past, when this was seen as a threat, they're more attractive now for their deep
pockets," said one local real estate professional I interviewed who wanted to remain anonymous.
Not surpassingly, the welcome mat is not out for military-backed enterprises. Nor does it include potential
investments in high-tech or real-estate-development projects. I think that will change, particularly if
Taiwan's economy registers a couple more consecutive quarters of contraction, and if its companies
continue to experience weakened global demand for its products.
The Art of the (Asian) Deal
Despite the very clear need, Taiwan is still trying to exercise some caution in deciding which deals to
approve. According to Deputy Economic Minister John Deng, if the capital comes directly from China the
economics ministry will review it. Capital coming from third party destinations "investing over 30% in, or
effectively controlling local companies" falls under the same scrutiny. Likewise, Deng noted, if China
invests in more than 10% of a company's stock, it will be "seen as [a] direct investment."
So far, the first couple of Mainland China delegations have already reached $68 billion worth of deals in
various industries. Some are undoubtedly smaller and involve a smattering of the 200 industries open for
direct investment, but it's the bigger transactions that have everybody excited because they are a
harbinger of better times and more profitable relationships ahead.
In April, for example, China Mobile Ltd. (NYSE ADR: CHL) offered $527 million for a 12% stake in
Taiwan-based FarEasTone Telecommunications Co. Ltd. Because it was made prior to the new rules and
involved the politically sensitive telecom industry, the consensus is that the deal won't pass scrutiny. But
you never know and that's part of the thrill of the hunt.
Portfolio manager Henrietta Luk of Melchior Asian Opportunities Fund notes that "local retail investors
have gone on a treasure-hunt frenzy guessing which is the next industry or company to link up with China,
leaving foreign investors chasing any stocks that are not limit up to make up for their hugely underweight
positions in Taiwan."
And they will have to chase them - literally. According to the Taiwanese Tourism Board, more than
300,000 Mainland Chinese visited Taiwan through April of this year, versus 320,000 during all of 2008.
The number of mainland airports serviced from Taiwan has increased from 21 to 27, while the number of
direct flights has soared from 108 to 270 per week, an increase of 150%.
Given that jump, it's no surprise that China Southern Airlines submitted the first bid under the new
regulations - or that the three rivaling carriers joined the hunt that same day.
If you're of the same opinion, and want to attempt to ride this wave yourself, consider getting started with
an investment in an exchange-traded fund (ETF) - specifically, the iShares MSCI Taiwan Index Fund
(NYSE: EWT). With top holdings in computer hardware (42.44%), industrial materials (21.93%) and
financial services (16.42%), you'll no doubt hit something on China's wish list soon.
Watch for agreements either late this year or early in 2010 that will permit the two countries to trade one
another's shares for the first time in 60 years - and then watch for the huge jump in liquidity that goes with
it. I've been hearing for several months now - very quietly, I might add - that regulators in both Taiwan and
China are considering a dual-listing agreement that would at least partially remove restrictions that prohibit
individual investors from directly investing in each other's stocks.
There's clearly a long way to go here with regard to the global financial crisis, but the flurry of cross-straits
activity we're seeing and the accelerating nature of the activities there provide important confirmation that
we're on the right track.
I have no doubt that Taiwan will turn out to be one of the region's powerhouse investments over the next
five years - albeit one that is more closely tied to Beijing's fortunes than many people on this side of the
Pacific are inclined to accept.
[Editor's Note: Fourteen trades. All profitable. Since launching his Geiger Index trading service
late last year, Money Morning Investment Director Keith Fitz-Gerald is a perfect 14 for 14,
meaning he's closed every single one of his trades at a profit. And he did this during one of the
most volatile periods for the U.S. stock market since the Great Depression. Fitz-Gerald says the
ongoing financial crisis has changed the investing game forever, and has created a completely
new set of rules that investors must understand to survive and profit in this new era. Check
out our latest insights on these new rules, this new market environment, and this new service,
Geiger Index.]
The impact was almost immediate.
On Friday, Guangzhou-based China Southern Airlines Ltd. (NYSE ADR: ZNH) submitted the first bid under
the new regulations and became the first mainland company to apply to invest in Taiwan. By the day's end,
three more of China's air carriers had joined the race and filed applications to invest in Taiwan: Air China
Ltd. (OTC ADR: AIRYY), China Eastern Airlines Corp. Ltd. (NYSE ADR: CEA) and Hainan Airlines Co. Ltd.
Clearly, these companies understand the stakes here, which is what's behind the rush for these potentially
lucrative new routes between Taiwan and China. Speaking for China Southern, spokeswoman Zeng
Qingning noted in the Taiwan News "we can begin selling tickets once our office is approved to become a
branch." My experience suggests that other companies are well advanced in their preparations too, which
is why this probably isn't the last we'll hear on this topic.
One-Way Street
Just last Tuesday, Taiwan's Ministry of Economic Affairs (MOEA) announced that China-based companies
and investors would be permitted to invest in more than 100 different product-and-service categories, and
that regulations governing applications by China-based companies seeking to open branches or
subsidiaries in Taiwan also were ready. These initiatives were an outgrowth of several new investment
accords reached in May between the Association for Relations Across the Taiwan Straits (ARATS) and the
Straits Exchange Foundation (SEF). When I reported on these at the time, I told Money Morning readers
that they literally were watching history in the making just as I was from my perch in China as the news
unfolded. Prior to last week, "cross-strait" investments had been a one-way street - from an official
standpoint, at least - with Taiwan companies having invested hundreds of billions of dollars in Mainland
China, including about $77 billion since just the late 1990s alone, The Wall Street Journal Asia reported.
In return, China's been allowed absolutely zilch and has been legally barred from making investments in
Taiwan. The fear - at least what's been stated publicly - is that China would use its rapidly expanding
economic might to blunt Taiwan's efforts to remain an independent nation. (You may recall from your
history books that China views Taiwan - formerly known as Formosa - as a "breakaway republic," a
position the island nation has held since 1949, when the two split during a civil war that led to the creation
of the communist-controlled People's Republic of China.)
China's Newfound Role as an Economic Savior
Behind the scenes, however, the story is much different. Many Taiwanese business leaders I've spoken
with confidentially welcome normalized relations and view the opening process as a development that's
long overdue. For them, it's not about political aspirations; it's about what China can do for their
over-leveraged, underutilized assets. Many, including new Taiwan President Ma Ying-jeou, for example,
are acutely aware of the fact that Taiwan missed out on many of the benefits of China's rapid
industrialization and global emergence over the past 10 years, thanks to poor political relations and
antagonistic regulation.
And it's cost Taiwan dearly. The desire for continued independence aside, once-proud Taiwan has
become another in a long list of nations around the world that are eating big slices of humble pie and that
now see China as a potential savior from the current global financial crisis.
Taiwan's experience with the Taipei 101 Tower is a concrete example of the potential benefit of China's
emerging economic might. The tower was supposed to stand as a symbol of Taiwan's newfound economic
prowess and, at the time of its construction, was the world's tallest building.
But it soon became a colossal white elephant. In fact, until very recently, it stood less than 50% occupied.
That's when several of China's corporate powerhouses took up residence, including:
* Lenovo Group Ltd. (OTC ADR: LNVGY), the growing global PC giant.
* Sinosteel Corp., the major iron-ore importer.
* And Tiens Group Co., a China-based direct-selling conglomerate that is the world's fifth-largest
healthcare products firm.
According to The Wall Street Journal, the building is now more than 80% occupied and rents in the area
have risen by 5% to 10% in anticipation of more highbrow Chinese clients. Of course, it doesn't hurt to
have such big-name players as Bank of America (NYSE: BAC), Google Inc. (Nasdaq: GOOG) and even
Merrill Lynch (NYSE: SAR) as tenants, but the reality is that the Mainland China companies are the firms
that are really being sought right now. That's particularly true at a time when the mainland economy
remains on track for annual growth of 8% or more this year, and appears to be the only one of the world's
top industrialized economies that's not in a deep state of denial or contraction or both.
The fact that China's bucking the trend is not lost on the Taiwanese business community. Nor is the fact
that many of the best-positioned and fastest-growing Mainland China companies are state-owned
enterprises.
"In contrast to the past, when this was seen as a threat, they're more attractive now for their deep
pockets," said one local real estate professional I interviewed who wanted to remain anonymous.
Not surpassingly, the welcome mat is not out for military-backed enterprises. Nor does it include potential
investments in high-tech or real-estate-development projects. I think that will change, particularly if
Taiwan's economy registers a couple more consecutive quarters of contraction, and if its companies
continue to experience weakened global demand for its products.
The Art of the (Asian) Deal
Despite the very clear need, Taiwan is still trying to exercise some caution in deciding which deals to
approve. According to Deputy Economic Minister John Deng, if the capital comes directly from China the
economics ministry will review it. Capital coming from third party destinations "investing over 30% in, or
effectively controlling local companies" falls under the same scrutiny. Likewise, Deng noted, if China
invests in more than 10% of a company's stock, it will be "seen as [a] direct investment."
So far, the first couple of Mainland China delegations have already reached $68 billion worth of deals in
various industries. Some are undoubtedly smaller and involve a smattering of the 200 industries open for
direct investment, but it's the bigger transactions that have everybody excited because they are a
harbinger of better times and more profitable relationships ahead.
In April, for example, China Mobile Ltd. (NYSE ADR: CHL) offered $527 million for a 12% stake in
Taiwan-based FarEasTone Telecommunications Co. Ltd. Because it was made prior to the new rules and
involved the politically sensitive telecom industry, the consensus is that the deal won't pass scrutiny. But
you never know and that's part of the thrill of the hunt.
Portfolio manager Henrietta Luk of Melchior Asian Opportunities Fund notes that "local retail investors
have gone on a treasure-hunt frenzy guessing which is the next industry or company to link up with China,
leaving foreign investors chasing any stocks that are not limit up to make up for their hugely underweight
positions in Taiwan."
And they will have to chase them - literally. According to the Taiwanese Tourism Board, more than
300,000 Mainland Chinese visited Taiwan through April of this year, versus 320,000 during all of 2008.
The number of mainland airports serviced from Taiwan has increased from 21 to 27, while the number of
direct flights has soared from 108 to 270 per week, an increase of 150%.
Given that jump, it's no surprise that China Southern Airlines submitted the first bid under the new
regulations - or that the three rivaling carriers joined the hunt that same day.
If you're of the same opinion, and want to attempt to ride this wave yourself, consider getting started with
an investment in an exchange-traded fund (ETF) - specifically, the iShares MSCI Taiwan Index Fund
(NYSE: EWT). With top holdings in computer hardware (42.44%), industrial materials (21.93%) and
financial services (16.42%), you'll no doubt hit something on China's wish list soon.
Watch for agreements either late this year or early in 2010 that will permit the two countries to trade one
another's shares for the first time in 60 years - and then watch for the huge jump in liquidity that goes with
it. I've been hearing for several months now - very quietly, I might add - that regulators in both Taiwan and
China are considering a dual-listing agreement that would at least partially remove restrictions that prohibit
individual investors from directly investing in each other's stocks.
There's clearly a long way to go here with regard to the global financial crisis, but the flurry of cross-straits
activity we're seeing and the accelerating nature of the activities there provide important confirmation that
we're on the right track.
I have no doubt that Taiwan will turn out to be one of the region's powerhouse investments over the next
five years - albeit one that is more closely tied to Beijing's fortunes than many people on this side of the
Pacific are inclined to accept.
[Editor's Note: Fourteen trades. All profitable. Since launching his Geiger Index trading service
late last year, Money Morning Investment Director Keith Fitz-Gerald is a perfect 14 for 14,
meaning he's closed every single one of his trades at a profit. And he did this during one of the
most volatile periods for the U.S. stock market since the Great Depression. Fitz-Gerald says the
ongoing financial crisis has changed the investing game forever, and has created a completely
new set of rules that investors must understand to survive and profit in this new era. Check
out our latest insights on these new rules, this new market environment, and this new service,
Geiger Index.]
| By Opening its Doors to China for the First Time in 60 Years, Taiwan Paves a New Path for Investor Profits by Keith Fitz-Gerald, Money Morning, July 7, 2009 |
| Money Morning is Your source for Global Investment News. Read Money Morning's Bio. Moneymorning.com |
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