Ryan Cole, The Investment U Research Team
With MJ’s passing, some rather astonishing news flew under the collective radar last week.
Taiwan has opened its economic borders to investment from China.
That’s a really big deal.
If America dropped the Cuban Embargo… that would be about 1/100 as momentous. It’s more like an apolitical (for now) eastern version of the Berlin Wall coming down.
Taiwan’s part in the play that is the Asian theatre is about to get much more complex.
And for investors, the opportunities are only beginning. Here’s a little background on why Taiwan will make a good trade partner for China, and why foreign investors need not worry.
Taiwan’s History of Fighting and Independence
A little history: In 1949, Chiang Kai Shek – the insurgent leader of China during the Japanese occupation – lost his civil war with Mao, and was driven from the mainland.
He took what remained of his army and fled to Formosa – a small island off the southern Chinese coast, easily defended from invaders. In fact, Formosa had been used exactly the same way, hundreds of years earlier, by a fleeing rebel leader under similar circumstances.
It’s China’s “loser island.”
Chiang had meant to regroup and launch another attack on Mao, retaking the mainland. The western world also wanted this, and for decades only recognized Chiang’s small island as the true Chinese government.
But, as we all know, that never happened. Mao’s communist revolution proceeded down its bloody path, while Formosa became Taiwan, Chiang Kai Shek’s totalitarian rule succumbed to democracy, and soon the little island had a greater GDP than the 1 billion souls on the mainland.
That was before China changed – from an oppressive communist oligarchy to an oppressive capitalist oligarchy. The Grand Experiment – Can a socialist autocracy thrive with a capitalist economic system? – continues apace, and the jury’s still out.
China has riots just about every day somewhere in the kingdom – whether these foment into something larger remains to be seen. They could easily go away if enough prosperity reaches enough people in time.
We just don’t know – this is a historic first.
The Big Dog (China) Rules
One thing is certain, though: China is now the big dog in Asia. With a GDP almost twice as large as Japan, by some measurements, China is a force to be reckoned with.
And, with exports down, with the worldwide recession pummeling everyone, Taiwan can no longer afford to ignore the behemoth to the west. So, she’s opened her economic borders to mainland companies. The changes will be sudden, and fierce.
Make no mistake – this isn’t because Taiwan has changed her mind about China.
If anything, Hong Kong’s experience has hardened Taiwanese resistance. Every time the other Chinese island loses more liberty… or holds another rigged ‘election’… or suffers another mainland corruption scandal… Taiwan becomes more proud of independence.
This isn’t an acquiescence – although it may let China in through the back door. Taiwan still has strict regulations in place – for instance, any Chinese company trying to take a controlling share of a local one must undergo review. Likewise, no military-backed business (and China has many) can invest in Taiwan.
In fact, only 100 industries have had their doors truly thrown open.
Invest in Taiwan Now, While The Getting’s Good
Taiwan is about to undergo massive changes. Exactly how this plays out is anybody’s guess – local competition could be ground out by the Chinese companies, or bought up by them, or exist in some form of unsteady stasis, for a time.
Consumer patterns shouldn’t change much – both sides have been able to sell to the other for awhile.
The only thing we know for certain – a massive influx of Chinese capital is about to flood the Taiwanese market.
For that reason, we highly recommend buying into the market before the rush becomes apparent to everyone. Specifically, we like index funds, like the iShares MSCI Taiwan Index Fund (NYSE: EWT). It’s up just over 10% the last three weeks, but that should only be the beginning.
China has hoards of cash, and no attractive options left for spending it. Her problems with U.S. bonds are well known; she doesn’t trust the dollar anymore. Her mass consumption of commodities is also well known, but there just isn’t enough gold, copper, and steel to satisfy China’s investment needs.
But now, Taiwan comes along as a virgin market. It doesn’t take a genius to see what’s going to happen. Sometimes, this job is easy. And, so to, early investors to Taiwan.
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