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Mainland Investors Knock at Taiwan's Door

05-20 09:41 Caijing

In a warming process unimaginable a few years ago, the Taiwan Strait is slowly becoming a two-way street for investments.



By staff reporter Xu Heqian
Reporting from Taipei

(Caijing Magazine) China and Taiwan signed three agreements April 26 in Nanjing marking the launch of regular airline flights across the Taiwan Strait, working together to fight crime, and strengthening financial cooperation.

The president of the mainland-based Association for Relations across the Taiwan Straits, Chen Yunlin, and the chairman of the Taiwan-based Straits Exchange Foundation, Chiang Pin-kung, signed the agreements, ending a 20 year, one-way investment flow from Taiwan to the mainland, as mainland businessmen were previously not allowed to invest in Taiwan.

The deal means mainland investors with capital, talent and technology will be seeking new opportunities for cooperation on the other side of the strait.

Three days after the agreements were signed, mainland telecom giant China Mobile said it had reached an agreement to buy a 12 percent stake in Taiwan's third largest telecom operator Far EasTone for NT$ 17.77 billion, or NT$ 40 per share -- a 15 percent premium. 

As the completion of the transaction is subject to relevant approvals, Far EasTone spokeswoman Alison Kao told Caijing the shares would not be sold without a green light from Taiwan authorities. Kao also said the deal would give China Mobile a seat on Far EasTone's board of directors, but would not give the Chinese the right to participate in daily operations.

The proposed telecom alliance hit Taiwan like a bomb, as it's been seen as a first sign of mainland investment that's expected to pour into Taiwan. And China Mobile is by no means alone in planning to invest in Taiwan. For example, mainland automaker Chery Automobile said it will invest NT$ 2 billion in a unit of Taiwan's Prince Motor to build cars in Taiwan for the global market. Mainland insurance companies such as Happy Life Insurance are also actively seeking opportunities to cooperate with insurance companies in Taiwan.

A Taiwan source said Guangdong-based real estate developer Country Garden is in the final stages of negotiations with Taiwanese real estate developer Farglory Construction to establish a joint venture. Each party plans to take a 50 percent stake in the venture, which would invest in Taiwan and the mainland.

Policy Support

Such business activity would have been difficult to imagine in years past. But change is coming with new policy direction that pleases investors on both sides of the strait. Yet before a memorandum of understanding (MOU) on financial cooperation between China and Taiwan can be signed, mainland investors can invest only in monetary instruments such as bonds and deposits with a tight cap of  NT$ 7.2 billion. After the MOU is signed, the maximum investment in Taiwan will rise to 10 percent of total QDII funds, or NT$ 22 billion.

Meanwhile, the Taiwan economic affairs ministry is drawing up detailed rules designed to let mainland companies invest in Taiwan. The rules were expected to be completed by the end of May.

Taiwan's media disclosed that about 30 percent of its manufacturing industry, 20 percent of the service industry, and 15 percent of public construction are likely to be the first areas opened to mainland companies. Areas such as semiconductors, aviation, telecommunications, mechanics and the oil industry are not among the first on the investment opportunity list. The financial and insurance industries will not be opened until the MOU is signed.

According to Taiwan's Mainland Affairs Council, the 12 major public construction and BOT (build-operate-transfer) projects committed by leader Ma Ying-jeou during his recent election campaign will be opened to mainland enterprise investments rather than project contracts. Taiwan also will take measures to avoid real estate speculation, according to the council.
 
In addition, Taiwan authorities require mainland QDII funds that plan to buy more than 10 percent of a company should first submit the investment for reviews by the Taiwan Investment Commission to avoid any real control by mainland companies in Taiwan listed companies through securities acquisitions.

In the past, mainlanders had trouble accessing their mainland bank accounts in Taiwan through the China UnionPay system. But technical hurdles have been overcome, and relevant regulations are being modified by Taiwan administrators, allowing mainland tourists to use China UnionPay. The Singapore government was an arbitrator for the case, said Sean Chen, chairman of the Taiwan Financial Supervisory Commission.

'Peace Dividend'

Although a financial supervision MOU and an economic cooperation agreement have yet to be signed -- and negotiations over access, legal amendments and regulations are still brewing -- expectations of a "peace dividend" are running high.

Stimulated by cross-strait cooperation potential and Taiwan tariff policies, a massive amount of foreign funds are entering Taiwan, resulting in a 44 percent gain for the Taiwanese stock market index since March, far ahead of other Asian stock markets.

Standard & Poor's lowered the national investment rating outlook for Taiwan from stable to negative in mid-April due to deteriorating financial conditions and debt. But the island maintained an AA-rating. The International Monetary Fund (IMF) pointed out in its World Economic Outlook that Taiwan's GDP growth will be less 7.5 percent this year, and zero growth can be expected next year. However, the resident securities investment in Taiwan's international financial income and expenditure accounts enjoyed a US$ 4.17 billion capital return since the third quarter 2008 after suffering larger outflows during the previous 18 years. Inflows increased even more significantly in the fourth quarter 2008, with a total capital return of NT$ 580 billion in the two quarters in the second half of 2008.

In the face of changing economic fundamentals and market volatility, Paul Chiu Cheng-Hsiung, Taiwan's vice premier of the Executive Yuan, said the toughest period has passed and, in the near future, Taiwan plans to relax regulations to encourage more mainland investment into its stock market.

Schive Chi, chairman of the Taiwan Stock Exchange (TWSE), proposed in April at the Boao Forum that cross-listing of Exchange Traded Funds on stock exchanges in Taiwan, the mainland and Hong Kong should start in the future, setting up a mutual trading platform. Schive also planned to further open the stock market and attract more investment from domestic and foreign funds. 

Chien-Fu Jeff Lin, chief convener of Taiwan's Competitiveness Forum, told Caijing that intense responses on Taiwan's stock market recently proved investors are rational. As long as some expect to make profits, prices will rise even without new policies.

Mainland investors could not invest in Taiwan in the past, and this one-way situation must improve, said Lin. Mainland capital can provide more investment for the electronics industry through the stock market, but the Taiwan government should be careful in areas of asset shares and real estate. Taiwan's home prices are already inflated, and more investments in assets will only drive prices to unaffordable levels, he said.

Dar-Yeh Huang, a professor at National Taiwan University, analyzed several factors that contributed to the return of capital and market activity. First, a series of interest rate cutting policies have driven large amounts funds in current deposits to seek investment targets. Second, the mainland has become the focus of an economic recovery after the global financial tsunami. A series of policies designed to expand consumer demand, such as marketing home appliances in rural areas, aroused strong market expectations in Taiwan. And third is the stimulation of the tariff reduction policy that started this year in Taiwan, such as the lowering of the maximum inheritance tax rate to 10 percent from 50 percent, bringing back about NT$ 500 billion.

Taiwan authorities also plan to grant tax exempt status to offshore banking customers to attract more investors to Taiwan. The Taiwan media has described the process as a convergence of foreign funds, mainland funds and offshore Taiwan funds.

Huang thinks as long as authorities spell out specific and clear policies, Taipei may no longer have to dream about becoming an asset management and operations center. "Taiwan's financial industry can make use of its wealth management advantage to serve wealthy people on the mainland," he said.

Huang and Lin believe that, compared with Hong Kong's experience in economic and trade integration with the mainland, Taiwan has a larger market, larger population and more complete industrial chain, which will guarantee better performance than Hong Kong for Taiwan in the future.

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