Just last week – for the first time in 60 years – Taiwan opened its doors to investments from Mainland China. The impact was almost immediate. On Friday, Guangzhou-based China Southern Airlines Ltd. (NYSE ADR: ZNH) submitted the first bid under the new regulations and became the first mainland company to apply to invest in Taiwan.

By the day’s end, three more of China’s air carriers had joined the race and filed applications to invest in Taiwan: Air China Ltd. (OTC ADR: AIRYY), China Eastern Airlines Corp. Ltd. (NYSE ADR: CEA) and Hainan Airlines Co. Ltd. Clearly, these companies understand the stakes here, which is what’s behind the rush for these potentially lucrative new routes between Taiwan and China.

Speaking for China Southern, spokeswoman Zeng Qingning noted in theTaiwan News “we can begin selling tickets once our office is approved to become a branch.” My experience suggests that other companies are well advanced in their preparations too, which is why this probably isn’t the last we’ll hear on this topic.

One-Way Street

Just last Tuesday, Taiwan’s Ministry of Economic Affairs (MOEA) announced that China-based companies and investors would be permitted to invest in more than 100 different product-and-service categories, and that regulations governing applications by China-based companies seeking to open branches or subsidiaries in Taiwan also were ready.

These initiatives were an outgrowth of several new investment accords reached in May between the Association for Relations Across the Taiwan Straits (ARATS) and the Straits Exchange Foundation (SEF). When I reported on these at the time, I told Money Morning readers that they literally were watching history in the making just as I was from my perch in China as the news unfolded.

Prior to last week, “cross-strait” investments had been a one-way street – from an official standpoint, at least – with Taiwan companies having invested hundreds of billions of dollars in Mainland China,including about $77 billion since just the late 1990s alone, The Wall Street Journal Asia reported.

In return, China’s been allowed absolutely zilch and has been legally barred from making investments in Taiwan. The fear – at least what’s been stated publicly – is that China would use its rapidly expanding economic might to blunt Taiwan’s efforts to remain an independent nation.

(You may recall from your history books that China views Taiwan – formerly known as Formosa – as a “breakaway republic,” a position the island nation has held since 1949, when the two split during a civil war that led to the creation of the communist-controlled People’s Republic of China.)

China’s Newfound Role as an Economic Savior

Behind the scenes, however, the story is much different. Many Taiwanese business leaders I’ve spoken with confidentially welcome normalized relations and view the opening process as a development that’s long overdue. For them, it’s not about political aspirations; it’s about what China can do for their over-leveraged, underutilized assets. Many, including new Taiwan President Ma Ying-jeou, for example, are acutely aware of the fact that Taiwan missed out on many of the benefits of China’s rapid industrialization and global emergence over the past 10 years, thanks to poor political relations and antagonistic regulation.
And it’s cost Taiwan dearly. The desire for continued independence aside, once-proud Taiwan has become another in a long list of nations around the world that are eating big slices of humble pie and that now see China as a potential savior from the current global financial crisis.

Taiwan’s experience with the Taipei 101 Tower is a concrete example of the potential benefit of China’s emerging economic might. The tower was supposed to stand as a symbol of Taiwan’s newfound economic prowess and, at the time of its construction, was the world’s tallest building.

But it soon became a colossal white elephant. In fact, until very recently, it stood less than 50% occupied. That’s when several of China’s corporate powerhouses took up residence, including:

• Lenovo Group Ltd. (OTC ADR: LNVGY), the growing global PC giant.
• Sinosteel Corp., the major iron-ore importer.
• And Tiens Group Co., a China-based direct-selling conglomerate that is the world’s fifth-largest healthcare products firm.

According to The Wall Street Journal, the building is now more than 80% occupied and rents in the area have risen by 5% to 10% in anticipation of more highbrow Chinese clients. Of course, it doesn’t hurt to have such big-name players as Bank of America (NYSE: BAC), Google Inc. (Nasdaq: GOOG) and even Merrill Lynch (NYSE: SAR) as tenants, but the reality is that the Mainland China companies are the firms that are really being sought right now. That’s particularly true at a time when the mainland economy remains on track for annual growth of 8% or more this year, and appears to be the only one of the world’s top industrialized economies that’s not in a deep state of denial or contraction or both.

The fact that China’s bucking the trend is not lost on the Taiwanese business community. Nor is the fact that many of the best-positioned and fastest-growing Mainland China companies are state-owned enterprises.

“In contrast to the past, when this was seen as a threat, they’re more attractive now for their deep pockets,” said one local real estate professional I interviewed who wanted to remain anonymous.

Not surpassingly, the welcome mat is not out for military-backed enterprises. Nor does it include potential investments in high-tech or real-estate-development projects. I think that will change, particularly if Taiwan’s economy registers a couple more consecutive quarters of contraction, and if its companies continue to experience weakened global demand for its products.

The Art of the (Asian) Deal

Despite the very clear need, Taiwan is still trying to exercise some caution in deciding which deals to approve. According to Deputy Economic Minister John Deng, if the capital comes directly from China the economics ministry will review it. Capital coming from third party destinations “investing over 30% in, or effectively controlling local companies” falls under the same scrutiny. Likewise, Deng noted, if China invests in more than 10% of a company’s stock, it will be “seen as [a] direct investment.”

So far, the first couple of Mainland China delegations have already reached $68 billion worth of deals in various industries.  Some are undoubtedly smaller and involve a smattering of the 200 industries open for direct investment, but it’s the bigger transactions that have everybody excited because they are a harbinger of better times and more profitable relationships ahead.

In April, for example, China Mobile Ltd. (NYSE ADR: CHL) offered $527 million for a 12% stake in Taiwan-based FarEasTone Telecommunications Co. Ltd. Because it was made prior to the new rules and involved the politically sensitive telecom industry, the consensus is that the deal won’t pass scrutiny. But you never know and that’s part of the thrill of the hunt.

Portfolio manager Henrietta Luk of Melchior Asian Opportunities Fundnotes that “local retail investors have gone on a treasure-hunt frenzy guessing which is the next industry or company to link up with China, leaving foreign investors chasing any stocks that are not limit up to make up for their hugely underweight positions in Taiwan.”

And they will have to chase them – literally. According to the Taiwanese Tourism Board, more than 300,000 Mainland Chinese visited Taiwan through April of this year, versus 320,000 during all of 2008. The number of mainland airports serviced from Taiwan has increased from 21 to 27, while the number of direct flights has soared from 108 to 270 per week, an increase of 150%.

Given that jump, it’s no surprise that China Southern Airlines submitted the first bid under the new regulations – or that the three rivaling carriers joined the hunt that same day.

If you’re of the same opinion, and want to attempt to ride this wave yourself, consider getting started with an investment in an exchange-traded fund (ETF) – specifically, the iShares MSCI Taiwan Index Fund (NYSE: EWT). With top holdings in computer hardware (42.44%), industrial materials (21.93%) and financial services (16.42%), you’ll no doubt hit something on China’s wish list soon.

Watch for agreements either late this year or early in 2010 that will permit the two countries to trade one another’s shares for the first time in 60 years – and then watch for the huge jump in liquidity that goes with it. I’ve been hearing for several months now – very quietly, I might add – that regulators in both Taiwan and China are considering a dual-listing agreement that would at least partially remove restrictions that prohibit individual investors from directly investing in each other’s stocks.

There’s clearly a long way to go here with regard to the global financial crisis, but the flurry of cross-straits activity we’re seeing and the accelerating nature of the activities there provide important confirmation that we’re on the right track.

I have no doubt that Taiwan will turn out to be one of the region’s powerhouse investments over the next five years – albeit one that is more closely tied to Beijing’s fortunes than many people on this side of the Pacific are inclined to accept.

Source: By Opening its Doors to China for the First Time in 60 Years, Taiwan Paves a New Path for Investor Profits

Editor’s Note: Fourteen trades. All profitable. Since launching his Geiger Indextrading service late last year, Money Morning Investment Director Keith Fitz-Gerald is a perfect 14 for 14, meaning he’s closed every single one of his trades at a profit. And he did this during one of the most volatile periods for the U.S. stock market since the Great Depression. Fitz-Gerald says the ongoing financial crisis has changed the investing game forever, and has created a completely new set of rules that investors must understand to survive and profit in this new era. Check out our latest insights on these new rules, this new market environment, and this new service, Geiger Index. ]]> http://www.contrarianprofits.com/articles/by-opening-its-doors-to-china-for-the-first-time-in-60-years-taiwan-paves-a-new-path-for-investor-profits/18799/feed 0 http://www.contrarianprofits.com/articles/new-travel-arrangement-with-china-could-lead-to-stronger-economic-growth-in-taiwan/3067 http://www.contrarianprofits.com/articles/new-travel-arrangement-with-china-could-lead-to-stronger-economic-growth-in-taiwan/3067#comments Mon, 16 Jun 2008 13:43:14 +0000 Jason Simpkins http://www.contrarianprofits.com/articles/new-travel-arrangement-with-china-could-lead-to-stronger-economic-growth-in-taiwan/3067 After completing their first official talks since 1999, China and Taiwan will open the first permanent offices in each other’s capitals and begin direct weekend passenger flights between their territories. The agreement is a positive step that will bring the two contentious regions closer together both politically and economically.

Approximately 3,000 tourists a day from 13 Chinese providences will be permitted into Taiwan, beginning July 18. There have been no regular flights from China to Taiwan since 1949, when just a few years after the end of World War II, the armies of Chinese revolutionary leader Mao Zedong moved into Shanghai and the existing Chinese government under Chiang Kai-shek decamped to Taiwan.

Under Zedong, China pursued hardline Communism for the next 30 years, with…

Today, Germany is a mature “developed market” that grows slowly if it grows at all. Today, China is the new Germany. The industrial dynamism that produced Germany’s post-war success is moving to the East…piece by piece.

The Ruhr Valley was the heart of Germany’s industrial might. For more than 200 years, the smokestacks in this northwest corner of Germany pounded out the steel and iron that would form the backbone of the nation’s industry. And when the war drums rumbled, these factories supplied imperial Germany with its field guns, armored tanks and shells. Prosperous communities grew up around these old blast furnaces and mills. People took pride in the stuff they could make with their hands. Tens of thousands found work in the factories of the Ruhr. Generations passed with the knowledge that their sons and daughters could make a life here and carry on the legacy of such a place. For a long time, that was the way it went.

But the winds of change patiently grind away at even the most impressive of advantages. In the early 1990s, the industrious workers of Asia powered the mortar and pestle that would crush the Ruhr’s traditional way of life.

It was a slow process, but the endgame was not hard to see. While the South Koreans became the most efficient producers of steel in the world, German workers were agitating for a 35-hour workweek. While the Chinese worked all day in their mills and new factories sprouted up like spring peepers all through China, Germany increased taxes and expanded its bloated government programs.

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By the turn of the millennium, no one could ignore the stark reality any longer. The mills and factories of the Ruhr started to close — forever. In his terrific book, China Shakes the World, James Kynge tells the story of ThyssenKrupp’s steel mill in Dortmund, one of the largest in Germany. The Germans called it the Phoenix, inspired by its rise from the ashes of bombing raids in World War II.

Within a month of ThyssenKrupp closing the mill, a Chinese company bought it with the idea of disassembling the entire mill and taking it to China, near the mouth of the Yangtze River. Soon after this Chinese company bought the mill, 1,000 Chinese workers arrived in Germany to begin the process of taking the plant apart and bringing it to China. The Germans got an up-close lesson in why they could not compete. The Chinese worked seven days a week for 12 hours a day. The Germans started to complain. So the Chinese, in deference to local law, took one day off.

In the end, the Chinese dismantled the mill in less than one year — a full two years ahead of the time ThyssenKrupp initially thought it would take.

When the Chinese departed, they left the makeshift dormitories and kitchens they occupied for a year neat and clean. There was, however, a single pair of black boots left in one of the dormitories. The boots carried the brand name Phoenix, which was the same name of the plant the Chinese just took apart. The boots also carried the label “Made in China.” Kynge writes, “Nobody could tell, however, whether the single pair of forgotten boots was an oversight or an intentional pun.”

Over 5,000 miles away, the Chinese rebuilt the steel mill exactly as it was in Germany. As Kynge writes: “Altogether, 275,000 tons of equipment had been shipped, along with 44 tons of documents that explained the intricacies of the reassembly process.” Doing all of this was still cheaper — by about 60% — than building a new mill. Plus, in China, the demand for steel was such that the mill could start producing steel immediately at full capacity.

As recently as 1975, China’s entire output of steel could not match this one mill in Dortmund. Now, the Dortmund plant itself stands in China. And in Germany, you have a dying industrial city, unemployed steelworkers and the scarred earth where the mill once stood. Germany is thinking of turning the site into parkland and perhaps creating a lake and marina. But as one burly steelworker says in Kynge’s book: “Do we look like yachtsmen to you?”

This remarkable vignette captures, on many levels, how the game has changed. Comfortable workers in the factories and mills of America and Western Europe have no idea what they are up against. Even so, the nature of global competition keeps shifting. We tend to think of emerging markets, such as China, as occupying a place down on the food chain of the global economy. We tend to think of these places as sources for cheap labor and natural resources. But more and more, these emerging markets are home to world-class companies in all kinds of industries.

This is the thesis of Antoine van Agtmael, author of a new book called The Emerging Markets Century. Agtmael is the man who coined the phrase “emerging markets” to describe growing, but less-developed economies such as China, India, Brazil, Argentina, Mexico, Thailand and other places. Before him, we called these markets “third-world” — which brings to mind many negative associations. To sell the idea, Agtmael came up with “emerging markets.”

However, those concerns have been assuaged recently, as many exporters throughout the Pacific have found a significant demand for their goods in other markets.

Exports to the European Union from China, Korea, Japan, and Taiwan grew by 22.4% year-over-year in the first-quarter according to Goldman Sachs Group Inc. (GS). Exports from those four Asian nations to emerging markets, excluding China, have grown by 36.5% for two consecutive quarters now.

“The ability of Japanese exports – and those from around the region – to continue to grow despite stagnant demand from the US has been one of the most striking features of the past year,” Macquarie Bank economist Richard Jerram told the Financial Times.

Exports to the United States from the four Asian export juggernauts grew 4.7% in the first-quarter, their slowest rate of growth since 2003, according to Goldman Sachs.

Demand is even strong in smaller countries such as Singapore. After falling 2.6% in March – when shipments to the United States fell at the sharpest rate in more than six years – non-oil exports rose 1.6% in April from March, Reuters News Agency reported.

Non-oil exports in April rose 5.4% from a year earlier to $10.2 billion, according to trade agency International Enterprise Singapore. That compares with a 5.9% fall in March. Singapore’s shipments to the United States fell at an annual rate of 16.9%, but exports to Europe and China climbed 16.9% and 19.2% respectively.

“Exports to the U.S. continue to be in the doldrums but the EU and China are still strong. Singapore has been able to decouple from the U.S. to some degree,” Joseph Tan, a strategist at Fortis NV told Reuters.

In South Korea, which relies on overseas sales for 40% of its gross domestic product, exports rose 27% in April, the fastest annual pace in more than three years. Lehman Bros. Holdings Inc. (LEH) has already raised its 2008 forecast for export growth in South Korea from 8.2% to 9.3%.

Vietnam plans to raise exports to Africa, the Middle East and south Asia to $2.3 billion this year, an increase of 33% from last year, the Vietnam News reported, citing an unnamed official at the Ministry of Industry and Trade.

“We have a lot of evidence to support the decoupling view,” Timothy Bond, Merrill Lynch & Co. Inc.’s (MER) chief Asia economist, told the AFP, referring to a view that Asian economies are moving away from dependence on the U.S. market, to a more diversified base.

According to Bond, the stronger euro, which makes Asian goods cheaper to European customers, is the main reason Asian exports to Europe have been growing 25%-28% annually.

“Europe has been the main driver of Asian exports over the past few years, not the [United States],” Bond said.

Source: Asian Exports Continue to Surge Despite U.S. Slowdown

It was cheap. The world’s cheapest stock market at the time. It was hated. Investors were worried the country would be invaded by China. It was in an uptrend. Taiwan’s stock market had just broken out to a new multiyear high.

We love to see all of these conditions for a trade in DailyWealth. When an asset is extraordinarily cheap and hated (or ignored), there’s little risk you’ll lose money. And by waiting for an uptrend before buying, you avoid tying your money up in a dead market for years.

In my Quant Trader service, we bought shares in the Taiwan Fund (TWN) to capitalize on the Taiwan opportunity. The trade worked out wonderfully for a few months… but we stopped out of the position this February as markets around the world plunged. It’s a shame… because this trade has huge potential.

So what do we need to see before jumping back into Taiwan?

The governments of Taiwan and China have been arguing over the jurisdiction of Taiwan for over 50 years. China has vowed to bring Taiwan back under its rule by force if necessary. This political risk is the reason why Taiwan was, and still is, so cheap.

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However, nowadays relations are improving…

The recent election of Ma Ying-jeou brings hope that the two governments will forge new diplomatic and economic ties over the next few years. This is a huge plus for Taiwan. It’s one of the most advanced countries in Asia and home to giant semiconductor and electronics manufacturing industries… so a friendly China will make for a good trading partner.

Another sign I like to see when investing in an Asian market: Legendary investor Jim Rogers has named Taiwan as one of his top spots for new money right now. He believes China and Taiwan will merge their economies and currencies together. This would likely create a huge stock market boom in Taiwan. And boy do these stocks have room to run…

As you can see, Taiwan is still extremely cheap and the long-term uptrend that began in 2003 is still in place. However, the short-term trend is down. The Taiwan Fund is down about 11% over the last month.

The U.S. and China are Taiwan’s two largest trading partners. So, Taiwanese stocks tend to fall alongside China and the U.S.

Again… that’s the short-term picture. Taiwan is a great place to hunt for long-term investments in the Asian economic boom.

The trouble with big stories like Asia is there’s usually too much hype surrounding them to get a great deal on assets. That’s not the case with Taiwan. It’s still cheap, and most folks are ignoring the opportunities. All we need is the uptrend before we stand to make huge returns here.

Good investing,

Ian Davis

P.S. I plan on letting readers of my Quant Trader service know the best time to buy this market. Right now, Quant Trader is only available to members of the exclusive S&A Alliance. Click here to learn about the best deal ever offered on joining this club.

From November through March U.S. stocks (and most global equity markets) suffered a string of five-straight monthly declines. That’s a very rare occurrence that has only happened on a handful of occasions in the past 40 years.

Sure enough, April saw a sharp reversal of the five-month downtrend. The Dow Jones Industrial Average had fallen over 11% at the March low. But the Dow got up off the mat in April and rose 4.5%. The Dow wasn’t alone. In fact, international stock markets pulled off much more dramatic reversals.

Japan is perhaps the most striking turnaround. I’ve been bullish on Japan since last year… and had been proven way too early through March. But Japan rallied strongly last month – soaring 11% in April alone – it’s biggest single-month gain since 1995! In spite of this rally, Japan remains one of the world’s most undervalued major markets, but now it looks like global investors are catching on.

Hong Kong, another one of my favorite overseas markets, also pulled off a major turnaround in April. After dropping -18% in the first quarter of 2008, the Hang Seng Index jumped 13% last month.

Taiwan, another favorite, rose 4% in April. Mainland China bounced back too – 6.3% last month. But Shanghai shares still have lots of “heavy lifting” ahead -they’re still down 30% year to date.

Perhaps the biggest surprise was commodities. Gold and crude oil rallied pretty much in tandem through the end of 2007 and early 2008. Oil was up another 12% in April – adding to gains of nearly 20% year to date.

The yellow metal however declined nearly 6% last month. That’s gold’s second consecutive monthly decline – perhaps this precious metal will go for five in a row too!

Of course last month’s market action could prove very fleeting indeed. And I doubt that the ultimate “bottom” of this bear market has yet been reached. However, with such broad-based strength in equity markets around the world, we may be in for a decent rally that has some legs.

On Wednesday, the Fed cut rates again as I expected to 2%. The financial media seems convinced that the Fed intends to “pause” sometime soon. That has helped the beleaguered U.S. dollar (talk about a bear market!) to stabilize somewhat.

If the buck can stage a more convincing reversal of fortune at this point, I would expect commodities to correct further, while global stocks (particularly emerging markets) should continue to get a boost. Stay tuned…MIKE BURNICK, Senior Editor & Global Markets Analyst

The Financial Times  describing the outflow of cash as “a record shift that accelerates a longer-term trend away from US and western European stock markets” caused by the credit crisis and subprime mess in the US.

“The outflows also accelerate a trend for investors to put their money either in ultra-safe cash options such as money market funds, or into riskier markets and high-fee products such as hedge funds,” according to the report. “They are abandoning the middle ground of mainstream equity and fixed income funds, especially in the developed markets.”

Investors pulled $70bn from US, Japan and Western Europe funds during the quarter. Funds with inflows were almost all focused on Taiwan, Russia, the Middle East and Africa.

According to a report by Dow Jones MarketWatch: “Not only Warren Buffett, but Bond King Bill Gross, our Fed Chairman Ben Bernanke, the Treasury Secretary Henry Paulson and the rest of America’s leaders can’t ‘figure out’ the world’s $516 trillion derivatives.”

This bubble, which has grown fivefold in five years from $100 trillion, now drives global economies, and it continues to grow despite the current bear market gripping the US.

It only takes a small amount of these highly-leveraged derivatives to go bad for the whole stockpile to blow up.

“The news isn’t all bad,” says Justice Litle.

“While investors gawk at America’s credit implosion like rubber neckers driving past a car wreck, there are good things happening in other parts of the world.

“For example, take a look at the iShares Brazil ETF (EWZ:AMEX) or the iShares Taiwan ETF (EWT:AMEX). The Taiwan iShares are at three-month highs as of this writing. About a week ago, the Brazilian iShares hit new record highs.”

“All over the developing world, there are real economies hungry for real growth, as opposed to the quant-engineered, subprime-juiced kind that burns up like paper in fire.”

“European shares have followed the lead from Asia and fallen in early trading, reports the BBC, “with investors troubled by signs that the US housing market is deteriorating.”

London’s FTSE 100, Frankfurt’s Dax and the Paris Cac 40 all fell by just over 1% in morning trade.

Asia fared worse. Hong Kong’s Hang Seng closed down 3.6% and Japan’s benchmark Nikkei 225 index closed 3.3% lower.

India’s Sensex index shed 5% before closing 3.8% lower while Taiwan’s Taiex dropped 1.47%.

Record home repossessions in the US and indicators that the credit crisis there is spreading have rattled investors, many of whom now believe the US is heading for, or has already entered, a recession.

Despite today’s bad news from the Nikkei, Eric Roseman remains bullish on Japan.

“Japanese consumer spending is responsible for about 50% of GDP. Any marked improvement in domestic consumption is therefore bullish for smaller companies and corporate earnings.

At this point, amid a bear market for global stocks, it’s hard to forecast when Japanese smaller companies will rebound. They’re unbelievably cheap at this point. Long-term investors should view Japanese small-caps as a cheap option with no expiration.”

And for China bulls, J. Christoph Amberger is tipping a Chinese-Canadian mining stock you can pick up for less than C$3. To find why this stock could double, click here.