One question that I am asked frequently is about the relationship between mainland China and Taiwan. This is a hot topic for investors in Asia because the history between the two nations over the years has been far from friendly.
The animosity between China and Taiwan dates all the way back to 1949. At that time, Chinese Nationalist troops suffered defeat at the hands of the Communists and retreated to the island of Taiwan. This created hostility and antagonism between the two sides and shut doors to trade and travel.
It was more than 30 years later before China re-opened its doors to travelers and immigrants from around the world when Deng Xiaoping came into power in the 1980s. Since then, more than one million of Taiwan’s most affluent, resourceful and ambitious citizens have picked up their families and moved to the Mainland — a move that brought $200 billion to the Chinese economy.
While Taiwanese investment flooded cash into the Mainland and added to the China Miracle, the island’s economy suffered from this loss of funding. Taiwan has experienced an economic slowdown since 2004, and as a result, it didn’t participate when other Asian stock markets rose substantially in 2006 and 2007.
Politics Opens Doors to Profits
Despite Taiwan’s struggles over the years, this island nation is on the verge of a turnaround. Last May, Taiwan elected a Pro-China president, Nationalist Party candidate and former mayor of Tai Pei, Ma Ying-jeoh. And from day one, Ma has taken a pragmatic approach to Taiwan’s relationship with China. He understands China’s rising position on the global scene, and that a strong relationship with the Mainland can stimulate Taiwan’s economic growth, making it easier for capital and people to move between China and Taiwan.
While Ma was sworn into office just as the global financial crisis was heating up, he hasn’t let the world’s woes deter his efforts to strengthen ties with China and boost Taiwan’s economy. In the year since he was sworn into office…
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Ma has taken big steps to cooperate closely with the Mainland.
In fact, we’ve already seen him follow through on agreements to increase direct air transportation and postal links. There are now 108 direct flights from the Mainland to the island each week, which has greatly improved travel and bilateral exchanges and trade between the two nations. It has cut my traveling time from Taipei to Shanghai in half.
More recently, we saw another big move, as China and Taiwan are agreeing to let the other region invest in its economy. On June 30, Taiwan’s Ministry of Economic Affairs announced what areas it was permitting Chinese businesses to invest in, including 64 manufacturing sectors, 25 service sectors and 11 public infrastructure projects. And over the next week, the two nations’ policymakers are meeting to discuss investments in each other’s financial sectors.
These are incredible developments considering the history between China and Taiwan.
A Winning ETF for Big Steps Forward
We are likely to see more steps taken to strengthen ties between the Mainland and the island in the upcoming months and years — both nations’ economies will benefit from a closer relationship. Taiwan, in particular, is likely to see its economy recover faster than other countries around the world due to its economic ties to mainland China.
So over the long-term, I am still bullish on Taiwan’s economic prospects, and I think the renewed cooperation between China and Taiwan will definitely be a long-term positive for the island’s economy. Investors are already catching on to this trend, as Taiwan’s benchmark Taiex index has jumped 39% so far in 2009.
And I think that the best way to profit from the strengthening ties between Mainland China and Taiwan is with an exchange-traded fund that allows you to play the whole Taiwan market at once — iShares MSCI Taiwan Index (EWT). The ETF has already jumped 33% this year, and you’re not going to want to miss out on the next surge higher.
For Robert Hsu’s latest advice on EWT, and the best China stocks to buy now, join China Strategy risk-free today.
