Coming in from the cold

Finally, a relaxation of travel restrictions will boost tourism to Taiwan. For one thing, a significant number of mainlanders will be interested in getting a first-hand view of the so-called renegade province, given the history between the island and the mainland.

Lest we forget, the National Palace Museum houses a collection of the finest Chinese artworks spanning over 4,000 years. Medical tourism is another potential growth area given that hospitals in Taiwan offer higher levels of service and care than those in China and are less crowded than those in Hong Kong and Singapore.

Following years of relative market underperformance, the Asian team finally capitulated and decided to visit Taipei recently, meeting dozens of companies with specific focus on the property and consumer sectors. Aside from the incredible business opportunities that will present themselves, we returned having found our preconceptions hopelessly misguided and a city bursting with potential. Alongside improving infrastructure, low crime rates, clean air and very little traffic, it also boasts some of the most competitive rents in northern Asia.

Until recently, Taiwan has been a perennial underperformer within the Asia-Pacific region for much of the last decade. However, important political changes have taken place that we believe will deliver enormous socio-economic benefits to the country and transform the market into a key destination for foreign and domestic portfolio capital.

For many investors, the weekend of 22 March 2008 was largely a non-event. Yet, its significance cannot be underestimated. In Taipei, a shock election victory by the Kuomintang (KMT) party was announced as thousands of voters, dismayed by the island’s protracted economic stagnation, opted for reform. The basis for success centred on a mandate of improving political relations with China and the lifting of various restrictions in order to promote economic, social and transport links between Taiwan and the mainland.

Specifically, President-elect Ma Ying-jeou will be focusing on five key objectives:
1) Resuming negotiations on the basis of the 1992 consensus (‘one China; different interpretations’).
2) Negotiating a peace agreement with the mainland that includes confidence building measures.
3) Facilitating economic exchanges leading to the establishment of a common market.
4) Increasing Taiwan’s international space, based on pragmatism.
5) Facilitating cross-strait cultural and educational exchanges.

Taiwan’s current restrictions fall into three major categories: travel, investment and imports. A lack of direct air-passenger links between China and Taiwan is a major hurdle to economic growth and greatly impacts the services sector. At present, it takes a full business day to travel from Taipei to Shanghai, whereas a direct flight would take about 90 minutes. This is highly problematic because a vast majority of Taiwan’s services sector is directly involved with Chinese-located manufacturers.

There is currently a blacklist in Taiwan containing thousands of items that cannot be imported from China or require approval, making it tough for foreign companies to do business because it disrupts their global sourcing whilst diminishing Taiwan’s future competitiveness.

This is justified on national security grounds, yet is a deliberate attempt by the government domestic industries in cotton wool. Most are household products, garments and food manufacturing items – exactly the kind of products where Taiwan has lost its competitive edge to the mainland.

In summary, whilst we do not expect the benefits from improved relations with Beijing to crystallise overnight, the first steps towards fostering a more harmonious and prosperous relationship with mainland China have been taken. It is our firm belief that the net result will be enhanced economic prosperity, but more importantly for investors, substantial long-term equity returns as Taiwan finds its spot in the sun once again.

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