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Taiwan's China Card

Ma Ying-jeou's opening to China raises investor hopes on the island.

Sheen Ching-jing (Tony) has made a small fortune investing in Taiwan property. Now he hopes to make an even bigger one in China.

Sheen is looking to sell a majority stake in his Agora Garden, a $500 million luxury hotel-condominium complex in the shadow of the capital’s landmark Taipei 101 skyscraper, to Chinese investors and then plow the proceeds into expanding his interests on the mainland, where he owns the Core Pacific Living City Mall, an office and residential complex in Yangzhou, some 150 miles northwest of Shanghai. The ambitious 61-year-old businessman isn’t letting any technicalities, like the fact that Chinese investment in Taiwan is illegal, stop him. For nearly 60 years the island state has barred investors from China, regarding them as a threat to national security, but like many of Taiwan’s top executives, Sheen is counting on the new president, Ma Ying-jeou, to follow through on a campaign promise and lift the ban.

“I want to be ahead of the pack, even before the new president legalizes Chinese investors in Taiwan,” Sheen says between drags on a Dunhill cigarette during an interview in the Agora Garden Hotel’s coffee shop.

Investors have been gushing with enthusiasm over Taiwan’s economic prospects since Ma won a landslide victory in the March presidential election after campaigning on a pledge to end a more than half-century-long political standoff with China. The U.S.-educated lawyer and veteran political insider, who took office in May, fulfilled part of that promise last month, when talks between Taiwanese and Chinese negotiators — the first in a decade — produced an agreement to allow direct charter flights between the two territories on weekends beginning July 4. And in addition to abolishing the prohibition on Chinese investment, a step that is expected at some point in the next year, Ma has promised to scrap restrictions that limit Taiwanese companies to having a maximum of 40 percent of their assets in China.

“The normalization of economic and cultural relations across the Taiwan Strait is the first step to a win-win solution,” Ma told a group of foreign journalists, including Institutional Investor, at an interview in the presidential office the day after his May 20 inauguration. “It is our expectation that, with the start of direct charter flights on weekends and the arrival of mainland tourists in early July this year, we will launch a new era of cross-strait relations.”

The new president has the avid support of the country’s business community, which blames Taiwan’s subpar economic performance over the past decade in large part on restrictions on ties with a rapidly industrializing China. “Business sentiment is very high right now,” says Daniel Tsai, chairman and chief executive of Taiwan’s Fubon Financial Holding Co., the island’s second-largest financial services company, with $59 billion in assets. “China is a very important piece of our global strategy. We all want more stable cross-strait relations.”

Sheen, who is chairman of Core Pacific Group, a conglomerate with interests in real estate, securities, petrochemicals and construction, recently traveled to Beijing, Hong Kong and Shanghai to seek Chinese investors for his Taipei complex; his son Elliot, 31, joined with other Taiwanese business leaders to host nine Chinese property investors on a three-day tour of Taiwan in mid-April, the first such visit since Beijing began market-oriented reforms in 1979.

“Ma’s victory is the best thing to occur in cross-strait relations,” says Sheen, who rose from poverty as a street-fighting gang member in the 1960s to become a millionaire broker of textile quotas by the age of 30 and today sits on the central committee of Ma’s ruling Nationalist Party. “Now we can finally focus on business and stop bickering over things we can never agree on.”

Taiwan’s trade with China has thrived in recent years, growing by 16 percent in 2007, to $102 billion. Taiwan is also arguably the biggest foreign investor in China. Since the early 1980s, Taiwanese enterprises have pumped in close to $150 billion, or almost 25 percent of all foreign direct investments in China; they have established more than 50,000 factories making everything from sports shoes for Nike to iPods for Apple Computer.

As impressive as these numbers are, however, political tensions and legal obstacles have prevented an even bigger flowering of commerce. Most of Taiwan’s investments in China have been funneled through shell companies in overseas tax havens, such as Hong Kong and the Cayman Islands, to escape government restrictions. Before the initiation of direct flights this month, Taiwanese executive had to travel through Hong Kong to visit their factories in China, an expensive and time-wasting nuisance. In addition, the flow of investments has been one-way, as Taiwan has forbidden Chinese investors to come to the island.

Heightened tensions with China, which claims that Taiwan is part of its territory, have prevented Taiwanese companies from taking full advantage of the mainland’s economic boom in recent years. The island state’s former president, Chen Shui-bian of the Democratic Progressive Party, strained relations with Beijing by advocating eventual independence for Taiwan, tightening restrictions on technology transfers to China and increasing military spending to $12 billion a year, or 2.5 percent of gross domestic product. China responded with its own military buildup, installing more than 1,000 missiles along its southern coast targeting Taiwan. In 2005, China’s legislature passed the Anti-Separation Law, which laid the groundwork for an invasion of Taiwan if it formally declared independence.

The deterioration in relations with China has taken a toll on Taiwan. The island’s economy has grown by an average of just 4 percent a year since 2000, down from about 6 percent during much of the 1990s and a peak of nearly 13 percent in the late 1980s.

Ma’s election marks a historic turning point for Taiwan and the ruling Nationalist Party. The Nationalists have dominated politics here since Generalissimo Chiang Kai-shek fled to the island along with 1 million troops and 2 million refugees after Mao Zedong’s Communists took power on the mainland. For decades the Nationalists maintained they were the legitimate government of China; the island held the Chinese seat in the United Nations Security Council until 1972, when it was obliged to cede it to Beijing. But the rise of the opposition DPP in the late 1980s and ’90s promoted a growing Taiwanese identity, which Chen exploited to win the presidency eight years ago.

Ma brought the Nationalists back to power by shifting the party’s attitude toward China, to viewing it as a potential partner rather than an enemy. The new president leaves the question of potential unification with China to a future generation, though he vowed in his inauguration speech “not to seek independence, nor unification, or military conflict” with Beijing.

The new policy of détente has proved popular. Ma won 7.65 million votes in the March 22 election, 2 million more than his DPP rival, former premier Frank Hsieh. Three months earlier the Nationalists swept legislative elections, winning 81 of the 113 seats in the Yuan.

Taiwan will declare a “truce on the diplomatic front” with Beijing, Ma asserted in his meeting with II and foreign journalists. Taipei will try not to engage in a tit-for-tat fight with Beijing for diplomatic recognition in exchange for China’s giving it “diplomatic space,” such as membership in the World Health Assembly and other multilateral organizations, he said.

Ma also promised to put an end to Taiwan’s so-called checkbook diplomacy, under which the island has given tens of millions of dollars to a number of countries in an effort to win their diplomatic support. Taipei is recognized by only 23 nations, most of them small ones like the Vatican, in contrast to Beijing, which is recognized by more than 180 nations. Efforts to win diplomatic support have backfired. Vice Premier Chiou I-jen resigned in disgrace in early May after $30 million he wired to a middleman’s account as part of efforts to get Papua New Guinea to switch its recognition to Taiwan went missing, along with the middleman.

The Nationalists have wasted little time in trying to thaw relations with China. Vincent Siew, Taiwan’s new vice president, was welcomed like a foreign head of state at the Chinese government–sponsored Boao Forum for Asia in April and was entertained by President Hu Jintao at afternoon tea, the highest-ranking meeting ever between China and Taiwan. “Let us face reality, envision the future and put aside differences and pursue a win-win strategy,” Siew said to Hu during their 20-minute meeting in Hainan, an island province in the South China Sea near Hong Kong. Hu in turn offered to invest NT$1 trillion ($33 billion), roughly one fourth of the investments needed under President Ma’s proposed “Love Taiwan” infrastructure program, which encompasses 12 megaprojects, including an islandwide expansion of the Taiwan High Speed Rail bullet-train system.

“If you let us to go to Taiwan as tourists and investors, why would we fire missiles at you?” said Pan Shiyi, chairman and co-CEO — with his wife, Zhang Xin — of Soho China, a Beijing-based and Hong Kong–listed property development company. “We’d be crazy, because we’ll be shooting at ourselves.” Pan and his wife were among a group of Chinese investors who visited Taiwan in April. The group was led by a former People’s Liberation Army propaganda officer, Liu Changle, chairman of Hong Kong–listed TV network Phoenix Satellite Television Holdings, who also has extensive real estate holdings.

So impressed was Pan that he’s planning to send teams to scout Taipei, Taichung and Kaohsiung for investment opportunities in the coming months in preparation for the lifting of the ban on Chinese investments. “We plan to open hotels in Taiwan that will cater to mainland tourists,” Pan said recently with a broad smile while sipping tea in the 52nd-floor executive lounge of Hong Kong’s Conrad Hotel. “More than 100 million Chinese tourists went abroad last year, and I tell you, most of them would like to go to Taiwan. We expect millions, perhaps tens of millions, of Chinese tourists visiting Taiwan every year.”

Beginning this month, Taiwan will allow direct weekend charter flights from the mainland. The government will permit slightly more than 1 million Chinese tourists to visit the island over the next 12 months, which should pump an additional $2 billion of revenues into Taiwain’s $5.7 billion tourism industry, according to Tony Phoo, a Taipei-based economist for Standard Chartered Bank. Ma plans to allow tourist numbers to more than triple by 2012.

Business executives also expect the government to loosen curbs on technology transfers, such as advanced semiconductor chips, says Henry King, a Taipei-based analyst at Goldman, Sachs & Co. Such liberalization could be a boon for such Taiwanese technology companies as Acer Group, the world’s second-biggest producer of notebook computers, and Taiwan Semiconductor Manufacturing Co., the world’s biggest computer chip foundry.

Ma’s policies have so far impressed international rating agencies. In April, Standard & Poor’s upgraded its outlook on Taiwan’s AA- sovereign debt to “stable” from “negative,” based largely on expectations that cross-strait ties will improve.

Still, the new president will have to maneuver carefully to improve relations with China. Although the DPP was routed in the recent elections, the party remains strongly opposed to closer ties with the mainland. “China is the main threat facing Taiwan,” the DPP’s new chairwoman, Tsai Ing-wen, told reporters after Ma’s inauguration. She vowed that the DPP would act as a “check and balance” on the government.

One close adviser to President Ma acknowledged that the easing of relations with Beijing would be gradual. “Ma can’t afford to be seen as someone who will give up Taiwan’s sovereignty for the sake of giving its business community an edge in investing in China or attracting investments to Taiwan,” notes Andrew Yang, a military affairs adviser to the president and secretary general of the Taipei-based Chinese Council on Advanced Policy Studies, which studies China’s People’s Liberation Army.

Ma has also sought to play down expectations. “We have melted only a small chunk of the iceberg,” he said in April after the meeting between Taiwan’s Vice President Siew and China’s President Hu. “There’s still a long way to go, and we will move forward at a stable pace, never in haste. But we will not go backward.”

Ma’s strategy is to “thaw the ice” and to leave the thorny political questions to a future generation of leaders, says Wei Wou, a professor of economics and a former dean at Tamkang University in Taipei. The Nationalists are willing to recognize that Taiwan is part of “one China,” but they are unwilling to submit the island to Beijing rule, he points out.

China, meanwhile, will not invade as long as Taiwan doesn’t declare de jure independence, says Guan Anping, a Beijing-based securities lawyer, government adviser and former legal aide to retired vice premier Wu Yi.

“It is this ambiguity that will give both sides room to wiggle and give each side face until some future generation comes up with a better solution,” explains Guan, who counts among his clients Heqiao Group, owned by the Koo family, who run Taiwan’s China-trust Financial Holding Co., one of the island’s top ten financial conglomerates. “I’m fine with that. What we need is peace, more business, more money to be made, not war.”

With Ma’s inauguration the U.S. “will have safely navigated a tense period in cross-strait relations,” U.S. Deputy Secretary of State John Negroponte told Taiwan’s official Central News Agency in May. Ma is, in effect, answering President George W. Bush’s call for maintaining the status quo across the strait when he met Chinese Premier Wen Jiabao at the White House in December 2003. Under the Taiwan Relations Act of 1979, the U.S. is obliged to sell the island defensive weapons.

Born in Hong Kong on July 13, 1950, Ma is the son of a senior Nationalist Party official who escaped to Taiwan with his family soon after his son’s birth. A career bureaucrat and politician, Ma earned a master’s degree in law from New York University and a doctorate from Harvard Law School before returning to Taiwan in 1981 to become the personal secretary to former president Chiang Ching-kuo.

Fluent in English, Ma often interpreted for Chiang at meetings with U.S. visitors, including former Washington Post publisher Katharine Graham. When she interviewed Chiang in October 1986, seven years after the U.S. switched its diplomatic recognition from Taipei to Beijing, the president announced that Taiwan would lift martial law and undertake political reforms leading to multiparty elections.

The ending of martial law in 1987 permitted the rise of political opposition in the form of the DPP; it also saw Ma’s political career take off. Serving as minister of Justice from 1993 to1996, Ma earned a reputation for toughness by tackling the so-called Bamboo Union underworld gang and chasing their leaders out of Taiwan. He then won election as Taipei mayor in 1998. In 2005 he became chairman of the Nationalist Party.

A soft-spoken man with a tenor voice, Ma stands six feet tall and has the photogenic looks and physique of an action-movie star. On inauguration day, Ma and First Lady Christine Chow, a career bank lawyer, entertained a crowd of 15,000 in Taipei Arena with their renditions of pop songs.

Ma has impressed Taiwan’s business community with his quick move to permit charter flights from China. “He’s a man of his word,” says Carl Chien, a senior country officer at JPMorgan Chase Bank in Taiwan. “He has a record of delivering what he says he’ll do. His predecessor had a record of not delivering.”

Chien’s father, Frederick, a former foreign minister, was Ma’s political science professor when the president studied law at National Taiwan University in the early 1970s. Carl Chien, who has known Ma for more than 20 years, says he believes that one of the president’s top priorities is to scrap the investment ceiling on Taiwanese corporations in China. “The more you invest in China, the more insurance you have against an attack,” he says.

China has so far welcomed the overtures from Taiwan. Two days after Ma took office, China’s top official for Taiwan, Chen Yunlin, said Beijing was ready to grasp “this historic opportunity.”

The two sides haven’t held direct government-to-government talks since October 1998, when officials met in Shanghai. Talks stopped after former Taiwanese president Lee Teng-hui announced that relations across the strait were between “two states” and did not involve “one China.”

In 2005, China welcomed a Nationalist Party delegation for discussions on improving relations.

Party officials visited Beijing at the end of May, laying the groundwork for the agreement in June to establish direct flights. “But our top priority is to reinitiate government-to-government talks, perhaps sometime later this year,” asserts Kao Koong-lian, the secretary general of Taiwan’s Straits Exchange Foundation, the government agency in charge of future negotiations with China. “The reason we grew so slowly in the past eight years is we didn’t grasp the China opportunity.” After the recent tourism deal, President Ma’s next objective will be to legalize Chinese investment in Taiwan, sometime in 2009, Kao says.

Taiwan likely will allow Chinese investors first into real estate and infrastructure before permitting them to invest in the stock market and finance industries, notes Chen Tain-Jy, the minister in charge of the Council for Economic Planning and Development.

“This is really good news,” says Sheen, the Core Pacific chairman. “I look forward to the day when I can take Chinese investments in my real estate development projects in Taiwan.”

Pan, the Chinese investor, says he has yet to decide where to start investing in Taiwan. But invest he will, he asserts. “One thing is for sure: We won’t be shooting missiles at Taiwan anymore.”