Winds of change
July 10 2007
Things in Taiwan are looking up. From having been the second worst
performer among Asian stock markets for the past two years, in the
past two months the Taiex has outperformed every market except South
The gain has been steady rather than explosive and, given the mostly
bullish conditions everywhere in recent times, they have gone largely
un-remarked. But they reflect a change in domestic sentiment which
in turn reflects a growing belief that next year will be a constructive
one in cross-strait relations.
There has long been a fear that the coincidence of presidential elections
in Taiwan in early 2008 with the build-up towards the Beijing Olympics
could create conditions for rash measures by Taipei, such as a new
constitution emphasising its separate status, to which Beijing would
be likely to respond harshly.
But the opposite seems likely to be the case. President Hu Jintao
continues to signal that he wants to entice the Taiwanese with kind
words and business opportunities, rather than strengthen their resolve
with threats. Beijing has also been relatively mild in response to
president Chen Shui-bian's efforts to play up Taiwan identity, confident
perhaps that Mr Chen's standing with the public is now very low on
account not of his cross-strait stance, but allegations of corruption
which in practice have much reduced his executive authority.
The Democratic Progressive Party candidate for president, Frank Hsieh
Chang-ting, a former mayor of Kaohsiung, is seen as more pragmatic
and has stated that he is in favour of allowing mainland tourism and
reducing restrictions on cross-strait investment flows, which would
more likely bring money into Taiwan than encourage more outflow.
Indeed, direct links could bring Taiwan people, as well as money,
back from the mainland so that they could enjoy Taiwan's order and
clean air, while profiting from mainland labour and markets.
Beijing would obviously prefer a Kuomintang victory, but in practice
a Ma Ying-jeou government might be no more easy to deal with than a
DPP one headed by Mr Hsieh. Mr Ma, who has a reputation for being indecisive,
would have to move cautiously to avoid the impression that, as one
of mainland origin who in his heart of hearts yearns for reunification,
would sell out Taiwan.
Mr Hsieh, on the other hand, may take the view that the strengthening
of the economy which would come from cross-strait links would be popular
and might not, as feared by many DPP supporters, erode the island's
separate status and identity.
The KMT and its pan-blue allies still look likely to win both the
legislative elections later this year and the presidential one. But
Mr Hsieh seems to have escaped being tarnished by Mr Chen's legacy
and has a reasonable chance of winning - better probably than the DPP
has of upsetting the pan-blue legislative majority.
For the time being, cross-strait issues such as tourism are likely
to be on hold as Beijing has no desire to offer any benefits to the
DPP in advance of the elections. But the charm offensive is likely
to turn to practical matters after the elections and as the Olympics
The prospect should continue to bring Taiwan money parked offshore
or generated on the mainland back into the local stock market.
The government is showing more confidence. The central bank has begun
to reverse its ultra-low interest rate policy, which was supposed to
spur the economy, but actually encouraged capital outflow. Higher interest
rates have seen a strengthening of the Taiwan dollar and played a role
in stimulating stocks.
The currency could yet rise a lot further, given how far it has fallen
behind the yuan and the South Korean won. Next to the Japanese yen
its low value is out of line with buoyant exports and a massive current
Corporate profits have also been very buoyant and dividend yields
on major stocks are higher on average than yields on government bonds.
Until recently, local liquidity had been flowing out of Taiwan into
other markets. To a small extent it has been a source of carry-trade
funding, though only on a small scale compared with Japan.
But political, valuation, earnings and interest rate conditions are
now probably moving in its favour. And although some investors are
still nervous about the election campaigns and their result, it now
has great defensive potential compared with most other regional markets,
and potential to boom if mainland money gets a chance to combine with
local punters and offshore Taiwan money.
Government funds are also likely to be buyers before the election.
The Taiex is still 3,500 points shy of its all time high of 12,682
back in 1990, but if politics and world markets remain benign, that
could be within reach by the time of the Beijing Olympics.
That is not to argue the deep ideological rifts will be healed or
that direct links will happen quickly and smoothly. But the political
cycles are in favour on both sides of the strait, and Taiwan has yet
to feel the tide of global liquidity which has already lifted less
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