Communist China and free-wheeling Taiwan cooperate in business to a surprising degree for two places that sporadically threaten to restart the civil war in China that ended in 1949.
In late June, the pair – you can’t say countries because China sees Taiwan as a renegade province – signed a free-trade pact that is the most significant cross-strait accord ever signed.
The Economic Cooperation Framework Agreement cuts tariffs on more than 200 items exported from China to Taiwan, and on about 500 items that are traded in the opposite direction, though restrictions remained unchanged on major Taiwan exports, such as PVC and semi-conductors.
Under the pact, China will open up service sectors such as banking, insurance, hospitals and accounting, while Taiwan has offered wider access in several areas, including banking and movies. The pact affects about 16 per cent of Taiwan’s exports to China and about 12 per cent of China’s exports to Taiwan.
The trade deal was only the latest business embrace between the pair. In May, China and Taiwan agreed to add 100 direct cross-strait flights per week, including a new route between Taipei and Shanghai (note previously there were no direct flights to/from Taipei to mainland China, all passengers and freight had to transit through HongKong). The same month, Taiwan opened its first tourism office in China, after more than 60 years of no official presence on the mainland.
In 2009, Taiwan allowed investments from mainland China in 100 manufacturing, services and infrastructure projects. Chinese investments were also allowed (up to 50%) in airports and harbour facilities. In the energy industry, Chinese companies were allowed to invest in oil and natural gas exploration services, petroleum products wholesaling, and fuel retailing.
So far, Taiwan businesses are estimated to have invested US$150 billion in China since 1991, according to Taiwan’s count. In 2009, Taiwan’s exports to China and Hong Kong were worth US$85 billion while the island’s imports from China and Hong Kong totalled US$26 billion. Exports account for more than two-thirds of Taiwan’s US$400 billion economy.
Business ties have flourished even though China has 1,000 missiles aimed at Taiwan and has threatened to attack if Taipei ever declares independence. But political tensions between the two have cooled since Taiwan President Ma Ying-jeuo, who was elected to office in 2008, shelved his predecessor’s pro-independence stance.
Ma’s drive has added to internal pressure on him, though. The trade pact has aroused opposition from those in Taiwan concerned about China’s expanding influence over Taiwan – where Nationalist troops escaped in 1949 after losing control of mainland China to the communists.
The issue of “One China” is controversial in Taiwan. Tens of thousands massed outside Taipei’s presidential office on June 26 to protest against the trade pact. Even more, about 100,000, turned up at an opposition rally on December 20 in Taichung for the same purpose. Some of these protesters were no doubt worried about losing jobs to the mainland.
But business is business, it seems. Taiwanese companies already have a large presence in China, many having moved their manufacturing plants from Taiwan to China over the last 10-20 years. However there were many administrative and regulatory hurdles placed on companies that did business in China. Taiwan was keen to reach a trade deal with China in order to reduce these hurdles and secure for its companies the same preferential treatment the mainland now offers the 10 southeast Asian countries of ASEAN and is likely to offer Japan and Korea.
Taiwan, as the smaller partner, is expected to benefit more in a proportional sense from increased business links with China, the island’s largest trading partner and its biggest overseas investment destination.
A Taiwan government study says the proposed trade pact will boost the island’s economic growth by up to 1.7 per cent annually, create more than 260,000 jobs and help attract over US$8.9 billion in foreign direct investment over the next seven years.
The advantages of Taiwan’s ties to China were highlighted by a report in May that showed Taiwan’s economy grew 13.3 per cent in the first quarter from a year earlier, thanks to surging electronics exports to China. As a result, Taiwan’s statistics bureau raised its economic forecast from 4.7 per cent to 6.1 per cent GDP growth for 2010.
Chinese visitors to Taiwan tripled in the first quarter of 2010, from a year earlier, and outnumbered Japanese visitors for the first time ever thanks to reduced restrictions on mainland Chinese travelling to the island. Reports for April showed Taiwan exports to China jumped 62% from a year earlier, after an 82 per cent gain in March.
The closer economic ties over time have helped the stock markets of China and Taiwan – though, once again, more the latter. Union China Fund at Union Securities Investment Trust said in June that Taiwan shares may rise as much as 15 per cent by the end of the year thanks to closer trade and investment agreements with China.
The Taiex has risen 10.4 per cent in the 12 months ended July 31 compared with a loss of 22 per cent for China’s CSI Index. Taiwan comprises 15 per cent of the MSCI Asia ex-Japan Index, while China accounts for about 27 per cent of the index.
They are bound to help each other become bigger parts of the index, if they keep the focus on business synergies rather than political differences.
David Urquhart is portfolio manager of the Fidelity Asia Fund