This is literally history in the making.

Not only do the accords considerably broaden goals Beijing has pursued since 1979 in an effort to stimulate cross-Strait links, but they also remove many of the restrictions that presently hamper more direct business-and-investment ties. For instance, airline flights are going to be “regularized,” and the chartered flights that have long been the only way to move between Mainland China and Taiwan will be replaced by regularly scheduled trips. There were also important agreements forged regarding crime prevention and financial cooperation.

While the immediate goals include a broadening of the strict investment conditions for Mainland China companies interested in expanding into Taiwan, both mainland and Taiwanese companies anticipate broad cooperation in such diverse sectors as solar energy, herbal medicine, automobile-parts production and aviation tie-ups to top the priority list.

Taiwan’s vaunted semiconductor industry appears to be off limits, for now, but I anticipate that will change within the next 24 months as Taiwanese authorities become more comfortable with mainland Chinese companies making direct investments into Taiwan-based firms – even to the point of acquiring a controlling interest.

If you remain skeptical, don’t forget that Taiwan’s United Microelectronics Corp. (NYSE ADR: UMC) just invested $285 million to acquire Chinese semiconductor manufacturer HeJian Technology (Suzhou) Co. Ltd., a move that gives it a solid foothold in Mainland China.

This is all big stuff, and it’s pivotal when it comes to investing because it forges links that many of the Chinese and Taiwanese people I’ve spoken with thought they’d never see. And it also reestablishes other previously existing links that many folks thought were lost forever.

Zhang Guanhua, the deputy director of the Chinese Academy of Social Sciences Institute of Taiwan Studies, recently told The China Daily that the agreements are “vital to the realization of direct trade across the Straits.”

I couldn’t agree more and have noted as much for several years. I’ve also noted that any agreements facilitating that type of cross-Strait trade would likely be accompanied by an enhanced currency-clearing mechanism designed to facilitate the movement of trade-related money – a key first step that will help the Chinese yuan gain valuable international exposure and help propel it to its eventual place among the world’s leading currencies, an important goal of the Chinese government.

And that’s exactly what happened.

As part of the ARATS/SEF agreements, Taiwan and China agreed to establish the regulatory framework needed for financial services firms to do business in each other’s markets. The two countries also called for the gradual establishment of a mutual clearing system for the Taiwanese dollar and Chinese yuan.

Having such a system in place will not only enhance Mainland China’s interest in making additional investments into Taiwan, it will also accelerate interest among Taiwan’s investors and companies to seek profit opportunities in Mainland China.

And rest assured, there will be a strong global spillover impact. Expect these dealings to nurture a serious interest among international investors and accelerate stock-market action in both countries – action that, up to now, was held back by the lack of a financial links of the type the accords create.

I can hardly wait to see what happens next, and I’m already carefully studying several promising companies that could be yet another rock in the foundation that becomes New China.

I’ll be reporting more on those opportunities very soon.

Source: China/Taiwan Investment Accords Will Lead to Profit Plays for Investors

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Still mindful of losing about $6 billion of the $8 billion CIC invested in Morgan Stanley (MS) and Blackstone last year, chairman Lou Jiwei not only bluntly rejected the notion of putting the government’s money into banks outside of its homeland, but did so citing an overwhelming fear.

“I don’t dare to invest in financial institutions now,” Lou, said today (Wednesday) at a conference in Hong Kong, Bloomberg reported. “The policies of the developed nations on these institutions are not clear. Until they are clear, I don’t dare to invest in them. What if they go bust? I will lose everything.”

The timing of Lou’s remarks has to be intentional, as government officials are about to enter its fifth round of continuing economic-focused dialogue with U.S. Treasury Secretary Henry Paulson. And he wasn’t the only high-profile person in China who trashed the health of the U.S. economy, which officially entered a recession earlier this week.

“American consumption, to be quite blunt about it, is toast, and when the consumption bubble goes that’s a big problem for this region,” Stephen Roach, chairman of Morgan Stanley Asia Ltd., said at the same conference. “There is no country in this region that is not either slowing or in recession right now because the world’s biggest end market for its exports is in serious trouble.”

One can’t help think Roach is overlooking the facts that Morgan Stanley was one of CIC’s biggest losing investments, and that China followed the United States’ lead last month in announcing a $582 billion economic stimulus.

That stimulus money will largely go to infrastructure projects – low-income housing, water and energy projects, airports, disaster relief and new railroads. [Editor's note: Money Morning recently identified five way investors can profit from China's stimulus.]

Ironically, those projects will be the focus of the United States’ next stimulus plan when President-elect Barack Obama takes office in January.

With little exposure to the mortgage-backed assets responsible for the meltdown of the world’s financial system, and billions being poured into infrastructure, China could come out significantly ahead of the West when the global economy finally rebounds.

But even with  $1.6 trillion in foreign currency reserves, China still lacks the firepower to bail out the rest of the world.

“China can’t save the world,” Lou told Xinhu. “It can only save itself.”

Source: China Slams Western Financial Firms

The email I received today was a bit breathless. In it my old friend told me that the competing guru liked one of my companies so much the he’d recommended it to his readers. And, that in less than two weeks it had gone up 138%.

Of course, he was recommending that they take profits.

That brought a smile to my face… and it put a knot in my stomach.

I was happy his people did so well… though AB&I readers have made more than 500% on the company because they met with it in Beijing back in 2004. Oh yeah, and they suffered with it too as it moved from the OTCBB, to the AMEX to the NYSE… a journey in which it was down more than 60% at one point.

As for the knot in my stomach? Well, a good friend of mine runs these tours to China and another good friend from Beijing leads them. So I did them a favor by lining up a couple of my best contacts.

But, you know what? I gave away the farm this time.

Now, a guy who had nothing to do in China five years ago when I was going there – and whose newsletter is new to the market – can brag to his readers about what a genius he is. Not only that, he can use this gain in his marketing as “real” as opposed to the pretend stuff he uses now.

The problem with China is that it used to be just a small fraternity of us who went there and we treated each with a nobles oblige shared by all forerunners.

It makes me sad that I have to now change my game plan – be more cautious.

You see, the guy who made the big 138% claim today – built it on my solid relationships in China – charges about $2,000 a year for his newsletter.

That’s 20 times the price of mine – millions of times more if you consider the time I have invested in China.

But, you already know that this is the way of life.

One day, “old school values” are merely yesterday’s values… clinging to them means you’ll get left behind… or worse.

You end up feeling as I do today – like a sanctimonious old fud.

Game on!

Lock and load.

Andy Carpenter

P.S. To let me know what you thought of today’s article, send an e-mail to: feedback@investorsdailyedge.com.

I realized this after receiving a thoughtful note from reader Eddie C., in response to last week’s piece, “China, Congo and the New Race for Africa.”

Sir,

As far as I can see, China is doing a real good job to these under-developed countries such as Congo. She put in her hard-earned capital to open up these countries, whether be they in Africa or Asia. It is a win-win situation. Where is the human rights violation?

The Chinese did not force these countries to buy opium at gun-point by a cohort of Western countries as what had happened to a weak China in the last century… they did not colonize countries like India or Malaya and treat their citizens as second class servants.

Your prediction that China would gain $400 billion out of a $4 billion investment is grossly exaggerated. Even if it is true, the profit will be shared by the people of Congo (as it is a joint-venture). Aren’t the US and the Europeans doing the same thing? Why pick on China?

…Please be fair and truthful.

Eddie C.

Dear Eddie,

I understand where you’re coming from. Let me make clear I wasn’t trying to bash China in regard to what they’re doing in Africa. In fact, I have a strong measure of respect for what they’re doing. What country wouldn’t want to act in its own long-term interests? What country wouldn’t want to leverage the power of wise investments today to supply their own vital resource needs tomorrow?

No, what China is doing in Africa is very smart.

You also point out that Africa will benefit from these investments. I don’t disagree. Odds are that Africa’s level of benefit could be very strong, especially in comparison to the disaster of Western aid — the hundreds of billions that have gone to waste in the past. When rich governments write checks to poor governments, all too often the cash winds up in the pockets of thieves and thugs.

Even charitable gifts can do more harm than good, as some African locals have lamented. When second-hand T-shirts and sweatshirts show up in poor countries by the truckload, they often wind up being sold on the black market. The net result is profit for bandits and a total block on any type of textile industry. (While local clothing makers can compete with cheap imports, they can’t compete with free.)

In contrast to all this, what China is doing is like night and day. Opening mines, building hospitals, paving roads… all these activities require training and infrastructure and jobs, and that’s a great thing. It’s a means by which Congo (and other countries) can benefit, not to mention the shared benefits of resource deals. I don’t want to take that away from China at all.

Valid Concerns

I still think Peter (the Congolese journalist) has reason to be concerned, though, because with China there are still valid human rights questions to ask. There is a lot of good that comes out of a bluntly pragmatic stance, but there is danger, too. In places like Sudan, China has shown its willingness to look the other way when atrocity occurs. Money flow from resource deals can wind up supporting that kind of atrocity.

There are also fair questions to ask about how resources are extracted and local land is used. When it comes to metal mining and oil and gas production, for example, we know there are better and worse ways to do it from an environmental standpoint.

The lowest-cost way to rip a resource from the ground is often the one that leaves that ground denuded by chemicals and all but stripped bare. So there are valid questions in regard to how Congo’s water and soil and sky might look in 20 years’ time.

As far as what the West did in the 19th and 20th centuries, and how to think about that — I can’t argue with you there. The history you point out is indeed a matter of record.

A Hard Question

This all leads to the question stated earlier: How to think about China? For many in the West, this question is still unresolved.

Some, like legendary investor Jim Rogers, embrace China as the next great nation and the rightful heir of the 21st century. Others, quite frankly, view China as an environmental black hole, an ongoing human rights disaster, and a large-scale military conflict waiting to happen.

Which view is correct? As global investors, we here at Taipan lean much more toward the Jim Rogers view. But, as with many things in life, the answer is not black and white. Instead there are many shades of gray.

It’s a stupid question.

1. China already owns a huge chunk of our national debt. It has accumulated $1.5 trillion in its foreign exchange reserves. At one point last year, it was adding $1 million a minute to its vaults. The U.S. already depends on China using that money to buy our bonds. It keeps our interest rates down. This by itself is more than enough power over our economy.

2. So far, the China Investment Corporation (CIC) – the name of its sovereign fund – has made investments totaling $200 billion. That’s a pretty big number. But only $60 billion of it is earmarked for foreign investment. And the U.S. will only get a small part of that. In other words, the numbers aren’t scary.

3. It’s invested $5 billion in Morgan Stanley. Oops. And $3 billion in Blackstone. Double oops. Maybe it’s not Americans that should be asking whether the Chinese should be investing billions into our companies, but the Chinese who should be asking whether they should be investing so much into assets falling in price.

Besides Chinese money, there are petrodollars, drug money, money from terrorist states and other suspect sources making their way into the global and U.S. economy. This is nothing new.

In a worst case scenario, can Chinese money exit all at once from U.S. companies – creating economic chaos? Can these small shares in very big companies lead U.S. companies into nefarious anti-U.S. activities?

No and no.

It reminds me of the paranoia surrounding Japan in the early 1980’s when they were buying some of our most cherished real estate. It’s true that Japan was (and is) an ally and China is a country where in some areas we cooperate and in some we compete. And in other areas we manage to cooperate and compete with them at the same time. In other words, it’s complicated.

U.S. companies have invested a great deal of money and technology into China. By the way, wouldn’t it be easier for the Chinese government to sabotage those investments on their own turf rather than pulling off something in the U.S.? And now, China is returning the favor – more with its money than technology.

I’m all for it. Anything that gives China more of a stake in our economy and our biggest companies doing well is fine by me.

What’s worrying me isn’t what they do with the $60 billion. It’s how they grew their foreign exchange reserve so fast. Our appetite for imports has made China a ton of money and has saddled the U.S with a huge debt.

A South Korean pension fund – the fifth largest in the world – just said it will stop buying Treasuries. Not being able to finance our huge debt is going to get us in the end, not China’s U.S. investments.