I see this as the first big step toward economic integration across the Straits, and political integration will come later. (source: WSJ)
Chinese businesses have been lining up to expand in Taiwan since a month ago, when Taipei introduced regulations that will bring the first Chinese investment allowed on the island in 60 years. Taiwan began accepting applications Tuesday.
The opening is part of an effort by President Ma Ying-jeou, who took office in May last year promising to look for common ground with China. His government announced the planned investment opening in July.
Chinese investment is still excluded from Taiwan's most economically vital industries, the manufacturing of semiconductors and LCD displays, and those sensitive to national security, such as telecommunications. But the opening trend could help reshape the island's economy and increase integration with the mainland.
The government is also hoping improved relations with China will attract investors from other nations, who have largely focused on the mainland market.
"We hope the policy would attract Chinese investors and eventually foreign investors," said John Deng, vice minister of the ministry of economic affairs, at a news conference announcing the opening.
For years, investment across the Taiwan Strait has been one-way. Taiwan estimates the island's companies have poured more than $77 billion into China since the early 1990s, and the real number could be two-to-three times that, including unregistered investments.
But Taiwan has long barred mainland companies from investing here, a legacy of the civil war that divided the two sides in 1949, and of fear in the island that China could use its economic heft to dominate Taiwan.
Since President Ma took office, and as Taiwan's export-heavy economy has struggled with the effects of the global recession, Taipei and Beijing have held a series of high-profile meetings to expand economic ties and transportation, including the first regular commercial air traffic and shipping links.
Taiwan seeks to sign a trade agreement with China slashing remaining tariffs and other trade barriers by the end of this year.
The result of these efforts has been a steady stream of tourists and, more recently, the first visits by groups of Chinese executives seeking investment opportunities.
Impediments remain. The first major Chinese investment deal, an April agreement by state-owned wireless carrier China Mobile Ltd. to pay about $527 million for 12% of Taiwan's Far EasTone Telecommunications Co., has yet to be approved by Taipei, and is unlikely to pass. Telecom services are conspicuously absent from the sectors now officially open for investment.
For investors in newly opened sectors, the application process could be difficult. The Ministry of Economic Affairs will hold a cross-agency review of applications monthly, and applications might be rejected when advanced technologies are involved.
Many people in Taiwan fear China could use its economic might to influence the island politically. The opposition Democratic Progressive Party said it will to push for a referendum on the trade deal with the mainland. "Taiwan is losing its economic autonomy and is likely to become another Hong Kong," said Chiu Tai-san, a former legislator with the Democratic Progressive Party and previous vice chairman of the Mainland Affairs Council, which overseas Taiwan's China policy. Hong Kong, a former British colony, reverted to Chinese rule in 1997 and has increasingly found prosperity as a service and logistics center for the Chinese economy.
But foreign businesses — whose investment in Taiwan has been declining in recent years — are welcoming the trend. Normalization "is upgrading Taiwan's economic strategic position," says Jerry Fong, an official with the European Chamber of Commerce Taipei.
One focal point of Chinese investment has been the Taipei 101 office tower, which when it opened five years ago was the world's tallest building. Built to be an icon of Taiwan's progress, the 509-meter jade-color tower was largely a white elephant, with almost half of its office space empty. Now representatives from major Chinese companies such as Lenovo Group Ltd., Sinosteel Corp., and Tiens Group Co. occupy the high-profile address. The building is now 80% occupied.
Anticipation of more Chinese renters has helped lift average rental rates in the area around Taipei 101 by 5% to 10%, says King Chiao, president of Hsin-Yuan Business Rehouse Co., a Taipei office brokerage.
The tower's shopping areas are now busy with shoppers from across mainland China. In the first six months of this year, the number of visitors to Taipei 101's observation deck rose 30% from a year earlier, almost all because of Chinese tourists, says Michael Liu, a spokesman for the building.
Beijing has been eager to use its economic clout to woo the island's population. China claims Taiwan as part of its rightful territory and aims to eventually bring it under Chinese control. Chinese President Hu Jintao has publicly encouraged Chinese enterprises to invest in Taiwan.
Beijing has sent a series of business delegations to the island in the past month, signing deals with a nominal value of $68 billion — although it's unclear how much of that will be realized. Prominent Chinese restaurant chains, including Quanjude Co. and Guobuli Group, have been gearing up to open Taiwan branches, according to the companies. Mainland restaurant chains have the green light to apply to invest in Taiwan.
Some other changes are under way. The number of Chinese tourists surpassed 300,000 in the first four months of this year, compared to 320,000 for the whole of 2008, According to Taiwan's Tourism Bureau. The influx has been helpful at a time when Taiwan's economy, battered by weak demand for its high-tech exports, has posted contractions for two consecutive quarters.
The prospect of more Chinese investment and signs of improvement in the global economy have driven Taiwan's benchmark stock index up 40% so far this year. Shares in hotel companies like Formosa International Hotels Corp., a five-star chain, have led the rally.
Economists say that substantial economic benefits might take a while to show, but over the longer term the impact on Taiwan could be significant. "The structure [of] investment spending will change from being highly geared to the volatile export sector to investment in the domestic sector," said Sharmila Whelan, an economist at CLSA Asia-Pacific Markets.