Taiwan opens sensitive high-tech investment with rival China

The investment deal points to deeper trust – and gains – between China and Taiwan.

Taiwan opened its sensitive high-tech industry and a raft of other sectors to investors from mainland China this month, bringing timely economic gains to the island and signaling a leap in political trust between two countries that once stood at the brink of war.

Taiwan's economic ministry spokesman said last week that the move to allow such investment was to "deepen cooperation between the two sides and expand the effects of mainland investment." Indeed, both China and Taiwan could gain from this partnership.

Investors from China will now be allowed to buy shares in industries that Taiwan once protected in an effort to keep technological secrets from leaking into the hands of trademark violators or spies.

And with the injections of Chinese money that will come to the island, Taiwanese companies stand to become more competitive against rival electronics firms from Japan and South Korea. Money from China may also create jobs here, a key election issue a year ahead of Taiwan's next presidential race.

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Benefits for China

China gets to link up with Taiwanese firms with technological know-how – advantages from decades of perfecting components for some of the world's bestselling computers and consumer electronics. Beijing has pushed for more access to Taiwan in return for allowing $12.2 billion worth of Taiwanese investment in China.

Much of what China wants is political. Beijing has claimed sovereignty over the self-ruled island since the 1940s, when Chiang Kai-shek's Nationalists fled there after losing the Chinese civil war to Mao Zedong's Communists.

Since 2008, when Taiwan's China-friendly President Ma Ying-jeou took office, the two countries have signed a series of trade deals. Taiwan had already opened more than 200 other sectors to China, attracting $139 million in investment and creating some 3,000 jobs on the island, official Chinese media say.

Through its extensive contact with Beijing officials, Mr. Ma's government says it believes China will be a responsible stakeholder in local businesses despite uneasiness in Taiwan that Beijing is using its economic might to improve the island economy and charm the citizens into wanting political reunification.

"Ma's government has opened up as much as possible to the Chinese now," says Shane Lee, a political scientist at Chang Jung Christian University in Taiwan.

China, meanwhile, can now infuse money into the backbone of the island's Gross Domestic Product, which is worth more than $415 billion.

"Politically they want to connect to Taiwan as widely as possible and as close as possible," says Alexander Huang, a strategic studies professor at Tamkang University in Taiwan. "Every investment [from China] comes with a political motivation. It would make Taiwan dependent on Chinese capital."

And China appears ready to have Taiwan dependent on China says John Brebeck, head of research with Yuanta Investment Consulting here.

"China obviously wants things the sooner the better, and the only danger from China is [if] Taiwan opens too fast," says Mr. Brebeck. "But Taiwan is not going to be opening the floodgates."

Moving fast, but not that fast

Investment caps of 10 to 20 percent in the riskiest of 42 sectors would stop Chinese investors, some backed by the Communist government, from digging into the affairs of local firms with sensitive proprietary information. Such caps prevent, for example, the Chinese from holding control as a board of directors for Taiwanese firms.

Chinese firms can own no more than 49 percent of a tech joint venture, subject to Taiwan government approval, and no firm can allow a general manager from China.

Ma plans to keep pursuing trade ties to help local companies and raise employment, which had suffered before 2008 as other export-dependent economies signed deals with Beijing. His Nationalist Party calls trust built on trade ties a prerequisite for political dialogue, to which it is receptive.

Experts see one short-term risk: If Taiwan's traditionally anti-China, antireunification opposition Democratic Progressive Party returns to the presidency in 2012, Beijing may retaliate by withdrawing investment, hurting local business. The opposition has warmed toward China, but hard-liners remain.

"I'm sure the Chinese would like to invest in an effort to exert more control over Taiwan and its economy and its politics," says Bruce Jacobs, an Asian studies professor at Monash University in Australia. "If I were Taiwanese, I would fear this."

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