China’s bailout of Taiwan is good for the region

By Wei Gu
August 26, 2009

wei-gu.jpg– Wei Gu is a Reuters columnist. The opinions expressed are her own —

If market performance is anything to go by, Taiwan is the biggest beneficiary of China’s economic stimulus.

Because of Taiwan’s heavy dependence on exports to Western consumers, it was assumed there was little Beijing could do about its downturn. But Beijing has gone out of its way to take care of the recession-hit island. This year, it sent several procurement missions to Taiwan to buy billions of dollars of goods, even though Taiwan’s trade surplus with China is already approaching as much as a fifth of its economy.

China might be pursuing its unification agenda. After all, it has vowed to bring the island under its rule, by force if necessary. But money is a lot better than missiles. The whole point of inter-dependency is that there will be less chance of confrontation. Taiwan could use more investment, particularly in properties and infrastructure, while China is looking for new areas in which to invest its excess liquidity.

In the short run, increased purchases from Taiwan may come at Korea and Japan’s expense. For example, computer maker Lenovo <0992.HK> is increasing its orders from Taiwan companies, probably also because Taiwanese firms are happy to stay as contract manufacturers.

But in the long run, warmer cross-strait ties not only  benefit Taiwan and are a positive for China, but also are a very bullish development for the region, which should lead to lower risk premiums in Asia.

The wall of Chinese money has pushed Taiwan stocks up almost 50 percent this year, making it the second best performing market in the world after China itself and followed a decade of underperformance. Taiwanese stocks are currently valued at 26 times of 2009 earnings — a premium versus the rest of the region.

Taiwan has seen a $250 billion retail capital outflow since 1996, but the trend reversed in the second half of last year with a $17 billion capital inflow after President Ma Ying-jeou took office in May and signed trade deals to open up tourism and transport sectors to China.

Gross domestic product rose 20.7 percent in the April-June period on a seasonally adjusted, annualised basis. Export orders to China stood out as the destination with the strongest growth momentum. This eased the pain in Taiwan, where GDP in the first quarter had plunged by a record 10 percent.

The first major deal since cross-strait relations started to thaw — China Mobile’s purchase of 12 percent of telecom operator Far EasTone — is an example of cash-rich Chinese firms scooping up Taiwanese assets for both commercial and political reasons.

China Mobile said that it hoped to learn from Taiwan’s experience with third-generation technology. A $529 million acquisition may appear to some a very expensive way of learning, but Chinese buyers know that valuations at home are even higher.

State-owned companies are eager to respond to government initiatives because establishing a foothold in Taiwan and playing a private-sector ambassadorial role will help them gain political clout in Beijing.

Investors are pinning their hopes on more mainland money flowing into the 100 sectors in Taiwan that are open to Chinese investment. They are also eyeing a landmark agreement that promises to open the two sides’ banking markets to each other.

While Taiwan has suffered from over-banking, lending in China is still a good business, and Taiwanese firms will have an advantage lending to fellow Taiwanese firms in China. The signing of that agreement has been delayed though — a sign that while deals such as direct flights between Taiwan and the mainland can be done, deeper breakthroughs will be harder.

As more Chinese investment flows into Taiwan, there will be a bigger risk of a backlash. Fearing that Beijing might withdraw all its investments if things do not work out as planned, Taiwan has scrutinised every goodwill gesture from China.

Most recently Taiwan irked Beijing by testing prefab houses — donated by China to house typhoon victims — for toxic materials. And previously, it rejected a pair of pandas whose name if said together meant “unification”.

China’s economy is ten times bigger, so there will always be concerns that Taiwan should not be too dependent on China. But that concern is overblown. It will be hard for China to pull out all its foreign direct investment at once. Moreover, Taiwanese firms are already exerting a big influence in certain sectors in China, such as electronics components and retail.

Taiwan backed itself into a corner in the past decade. It is time for a change. For China, the peace dividend it gets from Taiwan will be worth a lot more than the returns it makes on U.S. Treasuries. So it is probably a reliable bet that goodwill will continue to flow before Beijing even thinks about withdrawing.

– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund —

5 comments

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Let’s keep politics out of business. If China wants to procure products from Taiwan, it is largely the decision of the private, though some have links with the central government, companies of China. I personally don’t see how increased business with a neighbour means a deliberate bailout by another country.

Furthermore, the suggestion of using increased business as a claim for unification is laughable at best. Do I own the retail outlet just because I keep purchasing stuff from them? Do I own the diner just because I keep having my meals there? Perhaps it is favourable to the cause of the pro-unification groups that there is increased trade, but otherwise, its not really a justifiable claim.

Posted by Maurice | Report as abusive

[...] China’s Bailout of Taiwan is Good for the Region – Reuters [...]

Wei Gu : If you think China’s investments in Taiwan as simply benign commercial transactions, you are out of your mind.

The purpose is in the long run to be able to exert control. Witness recent Chinese attempts to buy media in Taiwan, which Taiwan rightly prevented.

In the short run, China needs some goods which it cannot produce regardless of its overwhelmingly large population. But more than anything, it needs factories to keep people employed.

Since China realizes it cannot take Taiwan by force (regardless of the occasional saber-rattling), it knows it can force Taiwan into its grip ever so slowly using economic means. THAT is the true purpose of its “largess” with Taiwan.

Posted by waiguoren | Report as abusive

Living under a decades-long threat of being taken by force by a neighbor that is 60 times more numerous (though only 10 times larger economically), the story of Taiwan does not fit the description from this article that its relation with China is that of a need-to-be-grateful bailed out economy.

Could it simply be that China buys Taiwan goods because those are best price for value, and invests in Taiwan companies because the Chinese managers expect a good return on investment, economically or politically?

When earlier this year Abu-Dhabi extended a loan to brother emirate Dubai in the UAE, some called this a bail-out. Using this term mixes up the concept of generous, even undeserved, money giving with simple economical and political interests; and does so unfairly, in my view.

Posted by Carlos | Report as abusive

china bailout of is good for the region, but…..

The business process is not that simple, from the suppliers point of perspective, business does not end at the point of sale. We recommend that you dig more before quoting “Biggest Beneficiary”

Posted by g | Report as abusive

Is this sort of growth sustainable?