Tags: China, Martin Hutchinson, Taiwan

The Politics of the "Two Chinas"

By , Money Morning •

By Martin Hutchinson
Contributing Editor

In 1949, just a few short 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 limited liberalization thereafter. Taiwan opted for a free-market economy, and the country has been a haven of low-tax capitalism ever since.

Taiwan - formerly known as Formosa - has been a full democracy since 1987. There are two main parties: There's the Kuomintang (KMT), the actual heir to Chiang Kai-shek's former Chinese government, and also the Democratic Progressive Party (DPP).

In 2000, after 50 years of KMT rule, the DPP took power under President Chen Shui-bian. Both the DPP and the KMT are firmly capitalist and committed to small government; it's in the area of foreign policy where they differ. The KMT is quite keen on reaching accommodations with China, while the DPP is inclined to proclaim Taiwan's full independence.

With its breakaway from China, Taiwan has diplomatic relations with only 24 countries, the largest of which is Costa Rica, but so what? The country undoubtedly saves money by employing fewer diplomats and we've already seen that its businesses flourish in the international marketplace. The only danger is that China might get rough, but since Taiwan has U.S. protection, we see that as a pretty remote possibility. Besides, as we've also demonstrated, Taiwan is rapidly helping China get rich; there can't be much of a motive to mess around with an already-good thing.

At last week's legislative elections, the Kuomintang won a big majority, grabbing 81 seats, to only 27 for the DPP. A presidential election is scheduled for March 22, at which the principal candidates will be Ma Ying-jeou of the Kuomintang and Frank Hsieh of the DPP.

As the presidential election looms, each side has accused its opposition of bribery. While corruption is certainly an important political issue, it isn't much of an economic concern: Taiwan ranked 34th on Transparency International's 2007 Corruption Perceptions Index, below Singapore (4th), Japan (17th), and the United States (20th), but above South Korea and Malaysia (tied for 43rd), China and India (tied for 72nd), and Thailand (84th).

There's one other important point to note: Taiwan is uncorrelated with all of your other holdings, a real bonus from a diversification standpoint, and one that makes our already-strong investment case for this country even better.

[For analysis on four Taiwan profit plays, please click here]

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