Taiwan voters opt for closer business ties to China

by Michael Collins, Investment Commentator at Fidelity

February 2012

Taiwan voters, placing money above ideology, have removed one concern for investors. They have re-elected as president Ma Ying-jeou of the Kuomintang Party, which favours strong business ties and smooth relations with its long-standing enemy, China. They thus thwarted the rise of a pro-independence candidate who could have renewed tensions with China and, in turn, between China and the US.

Ma, during his first four-year term, drove a free-trade pact and direct travel and postal links between Communist China and free-wheeling Taiwan. These steps have boosted business between the pair that over the years have sporadically threatened to restart the civil war in China that ended in 1949.

China regards Taiwan as a renegade province even though Taiwan has been beyond China’s control for most of its history. Taiwan, where the losing Nationalist forces fled in 1949, is effectively an independent liberal democracy since allied to the US.

Officials in Beijing had warned that relations would crumble if voters elected Tsai Ing-wen of the Democratic Progressive Party as president. This party under Chen Shui-bian rankled China when it pushed for Taiwan’s recognition as a sovereign nation during his eight-year term that ended when Ma took office in 2008. (Chen’s election in 2000 ended nearly 50 years of largely one-party rule by the Kuomintang or Chinese Nationalist Party – Taiwan’s first free elections only took place in 1996.)

Ma won the January 14 poll dominated by the issue of Taiwan’s relationship with China with 51.6% of the vote compared with 45.6% for Tsai, as the Kuomintang held its majority in parliament. Taiwan voters, no doubt, want to see more of the economic gains that flowed from the all-encompassing Economic Cooperation Framework Agreement, which was signed between Taiwan and China in June 2010. An increase in tourism from China, tax exemptions, direct flights over the Taiwan Straits and greater access for Taiwanese financial institutions to mainland China have helped the economy of 23 million people weather the global financial crisis.

Taiwan’s government expects Taiwan’s export-driven economy to expand 4% this year, the same as last year, after growing 11% in 2010. Two-way trade between Taiwan and China reached US$160 billion (A$155 billion) last year, a 10% jump from 2010. There are an estimated 550 direct flights across the Taiwan Strait each week.

Not too close

The opposition was hoping to benefit from the angst that closer ties to China threaten the autonomy of Taiwan, where the majority opposes unification with China.

Critics slam Ma’s approach to China as “appeasement” as they see that China’s military buildup and growing international assertiveness will result in their homeland being absorbed into China. The trade pact was controversial at the time. Demonstrations attracting more than 100,000 people protested against agreement – some, no doubt, worried about losing their jobs to the mainland on top of any political concerns.

Hardliners in China, especially the military, oppose closer economic ties too, fearing that Beijing’s preoccupation with the economy has dashed hopes for reunification with Taiwan. The Communist Party officially sees that Taiwan’s absorption would complete its mission to overcome the humiliation of China’s colonial carve up.

China’s government requires other countries to recognise its sovereignty over Taiwan (the “one-China policy”), or risk diplomatic and commercial ties, and blocks Taiwan’s participation in most international forums. China has more than 1,500 missiles pointed at Taiwan and has threatened to attack if the island formally declares independence. The US says it will defend Taiwan in such circumstances. While the US government was officially neutral about the outcome of the January 14 poll, it gave numerous hints it supported Ma, as did Australia. The White House’s congratulatory statement to Ma spoke of “cross-strait peace, stability and improved relations” as being of “profound importance to the United States”.¹ China and the US are Taiwan’s largest trading partners.

The fact that 45% of Taiwan voters supported the opposition, however, might prompt Ma to slow his quest for closer ties to China by, for instance, offering new tariff concessions, reducing restrictions on Chinese visitors or making it easier for Chinese companies to invest in Taiwan infrastructure. The pace of change might slow anyway because Ma may have to confront China about more troublesome issues such as the missiles aimed at Taiwan and better protection for Taiwan investment in China.

But the direction of ties with China is settled for now since Taiwan voters have backed his agenda.

Financial information comes from JPMorgan and Bloomberg unless otherwise stated.

Important information

References to specific securities should not be taken as recommendations.

Investments in small and emerging markets can be more volatile than investments in developed markets.

Investments in overseas markets can be affected by currency exchange and this may affect the value of your investment.

1 The White House. “Statement by the press secretary on Taiwan’s elections.” 14 January 2012. http://www.whitehouse.gov/the-press-office/2012/01/14/statement-press-secretary-taiwan-s-elections