Check on China: The coming Taiwan boom

While everyone has their eyes on Chinese stocks, one region that should also be attracting investors’ attention is Taiwan. After a long economic malaise, the island’s stock market is set to take off. The reason: Taiwan’s political climate will soon allow its capital markets to profit from the China boom.

It would make sense that the Taiwan stock market should be booming because of its close economic ties to China. The independently ruled island is in fact one of the largest foreign investors in China with over US$150 billion invested in the mainland, and is the home to some of the world’s best hi-tech companies, such as Taiwan Semiconductor (NYSE: TSM) and United Microelectronics Corporation (NYSE: UMC), both of which have extensive operations in China. More impressive, it is one of the few countries that carry a trade surplus with China. According to official Taiwanese statistics, the island posted a trade surplus of $27 billion with China in 2006, up from $23.5 billion in 2005.

With so much going for it, the Taiwan bourse should be growing along with China’s. However, the island’s Taiwan Security Exchange Commission Weighted Index (TSEC) has a year-to-date increase of a modest 3.7% compared with a remarkable 32% year-to-date gain in the Shanghai Index. The reason for the lagging expansion in Taiwan is politics.

Taiwan President Chen Shui-bian of the island’s pro-independence Democratic Progressive Party (DPP) has tried to do almost everything he can to reduce Taiwan’s economic relationship with China.  Claiming national security reasons, he sought to impose new curbs on the amount of Taiwanese investment in China (Taiwanese law currently restricts a Taiwan company’s investment on the mainland at 40% of its net worth) and even threatened to criminally prosecute Taiwanese businesspeople who violate such rules.

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