Breakthrough Means Big Gains For Taiwan, Greater China

Breakthrough Means Big Gains For Taiwan, Greater China
The investment spotlight has abruptly snapped from Shanghai to Taipei, as we continue to track the world’s fastest-growing stock markets. The market breakthrough started last week when state-owned China Mobile (CHL) agreed to buy 12 percent of Taiwan's Far EasTone Telecommunications for $529 million.
China Mobile's surprise acquisition of a modest stake in Far EasTone has suddenly sparked hopes of more Chinese investments in Taiwan, driving Taiwan's benchmark index higher last week, and fueling its largest percentage gain in nearly 18 years!
The deal represents a startling shift in the decades-long hostility between the island nation and mainland China, and much more is to happening.
One day after the China Mobile deal the Taiwanese government announced that it will allow institutional investors from China to buy into the island’s stock market for the first time since the two sides split in civil war. The financial and political repercussions are enormous and should seize the attention of international investors everywhere.
Starting this week, mainland institutional investors will be able to apply to buy Taiwanese shares as long as the holding does not exceed 10 percent of a listed firm’s total share value, according to Taiwan’s Financial Supervisory Commission. As stocks on the Shanghai Exchange flirt with excessively high valuations, there is considerable Chinese capital looking for undervalued stocks, and this new opening to Taiwan provides an opportunity for mainland China investors to push up stocks in Taipei. That appears to be happening with lightning speed.
The China Mobile deal breaks the ice in relations between the mainland and Taiwan by shepherding in the first important investment by a Chinese company into a Taiwanese firm. This one breakthrough transaction in the politically sensitive telecom industry could also lead to more openings for investments in Taiwan’s cash-hungry financial services industry.
Already, envoys from the two sides have signed a financial cooperation agreement that paves the way for the two sides to open banks and other financial service institutions in the other's territory. Taiwan has long banned such arrangements, fearing they would allow Beijing to gain control of its economy. But Taiwan’s new President, Ma Ying-jeou has pushed aggressively for closer economic ties since he took office last May, stressing they are crucial for Taiwan's continued economic integration in the region.
Not surprisingly, financial, telecom and high-tech shares are now surging on the Taipei exchange.
The sudden thaw in relations with the mainland could provide more opportunities for Taiwanese companies to export semi-finished products to China for completion by China’s low cost labor force and to export finished goods to the U.S. and the European Union. The huge domestic market in China also offers new opportunities for Taiwanese exporters.
Investors should also consider the possibility of a peace dividend. For decades Taiwanese shares have been shadowed by the threat of war between the Mainland, which has always claimed that Taiwan is an integral part of Chinese territory. Until last year’s election, Taiwan’s former president inflamed relations with China by threatening to declare independence, the very words that could spark an invasion.
China put up furious resistance to Taiwanese statehood by blocking diplomatic recognition of Taiwan and by barring Taiwanese entry into world bodies. But in the final hours before the May Day holiday, China dropped its longstanding opposition to Taiwan’s participation in the World Health Organization’s annual assembly, also paving the way for the island to attend a UN meeting next month for the first time since 1971.
Breakthrough events are happening on the Taiwan front with breathtaking speed. An investment revolution appears to be following the political revolution as a possible peace dividend pays off at last.