Sunday 10 May 2009
Market Mood
Owing to the mismanagement of Taiwan’s former president Chen Shui-bian, the Taiwanese economy and stock market lagged behind those of its neighbours in past years. When Ma Ying-jeou took over, he raised hopes of an economic revival but the global financial crisis erupted soon after. And Taiwan, like other economies, could not escape its wrath.
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Market Mood
Paul Pong
Updated on May 10, 2009
Owing to the mismanagement of Taiwan’s former president Chen Shui-bian, the Taiwanese economy and stock market lagged behind those of its neighbours in past years. When Ma Ying-jeou took over, he raised hopes of an economic revival but the global financial crisis erupted soon after. And Taiwan, like other economies, could not escape its wrath.
But this is only a passing phase as a structural change in Taiwan’s economy is inevitable.
Often political changes in a region’s economy lead to long-term structural changes.
We have seen this first-hand. In the late 1970s, Hong Kong underwent a structural change in its economy after Beijing introduced the “open-door” policy. It has since morphed from an industrial city to a financial centre.
Back then, Hong Kong manufacturers began to set up factories on the mainland and repatriate profits to Hong Kong. Foreign companies channelled their money through Hong Kong to enter the mainland market. With capital flow to Hong Kong increasing rapidly, its financial industry took hold with matching speed, offsetting the negative impact of factories relocating to the mainland.
On the contrary, Taiwanese manufacturers on the mainland would seldom transfer their profits back to Taiwan because of the lack of investment opportunities at home.
There has been a slew of economic and trade co-operation deals between Taiwan and the mainland, on issues ranging from tourism to food safety.
If not all, at least some of these agreements will lead to better performance for Taiwan stocks.
For instance, some 150,000 mainlanders visited Taiwan from July 18, 2008 to the end of March this year. According to Tourism Bureau estimates, mainland visitors spent an average of US$295 per person per day. With an average stay of seven days, this would reap NT$80 billion (HK$18.7 billion) a year.
Mainland businesses investing in Taiwan is no longer a far-fetched possibility. The cross-strait financial supervision co-operation memorandum has raised the cap on investments by qualified domestic institutional investors from 3 to 10 per cent.
The capital flow from the mainland to Taiwan is likely to increase as a result, boosting the Taiwanese economy and stocks.
China Mobile has announced it will spend HK$4.08 billion in acquiring a 12 per cent stake in Taiwan’s Far EasTone, the first time a mainland enterprise is investing in a Taiwanese firm in 60 years. As the telecommunications industry is politically sensitive, the deal shows cross-strait relations are improving much faster than what was expected. One can only expect more and more mergers and acquisitions in the future.
The market buzz is that mainland property developer Country Garden will set up a joint venture company with Taiwanese developer Farglory Land.
In addition, Taiwan’s Ministry of Interior has said a list of fields where mainland investment will be permitted will be released in two weeks.
Mainland institutional investors would be able to purchase real estate for offices, factories or apartments. Mainland company staff would also be allowed to stay in Taiwan for more than a year. The consequent rise in demand for Taiwanese property will help stimulate its economy.
Last week, Straits Exchange Foundation chairman Chiang Pin-kung threatened to quit, amid talk that Kuomintang chairman Wu Poh-hsiung would take his place. That Mr. Ma moved to persuade him to stay on demonstrates just how serious Taipei is about improving relations with Beijing.
Taiwan-related stocks have already started to reflect the optimism for better ties and the resultant economic gains. Ever since China Mobile announced the acquisition, Taiwan-related stocks have soared (see chart).
Taiwan’s economy has a bright future but let’s not get carried away. It’s important to understand that not all Taiwan-related stocks will benefit. So do your homework before you join the party.
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