New Travel Arrangement with China Could Lead to Stronger Economic Growth in Taiwan

By Jason Simpkins
Associate Editor

After completeing their first offical 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 contentous 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 limited liberalization thereafter. Taiwan, on the other hand, opted for a free-market economy, and the country has been a haven of low-tax capitalism ever since. Having concluded their first meeting in nearly a decade, tensions are beginning to thaw.

"The significance is that it reflects a certain political reality," Joseph Cheng, a politics professor at City University of Hong Kong said in an interview with Bloomberg News. "China has to show goodwill to the Taiwan people so as to prevent them from moving down the road to independence. China has come to appreciate the basic parameters in Taiwan - the improvement of economic ties and let's forget reunification for the time being."

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Direct flights across the Strait of Taiwan could add about 60 to 80 basis points to Taiwan's economic growth Goldman Sachs Group Inc. (GS) analyst Enoch Fung said in a report Friday.

Goldman currently forecasts Taiwan's gross domestic product growth will slow from 5.7% in 2007 to 4.5% in 2008.

Trade between China and Taiwan totaled 43.9 billion in the first four months of the year - a 22% improvement from 2007, Bloomberg reported. At the end of April, cumulative investments from Taiwan in China reached $46.4 billion.

[Editor's Note: All this growth that China is experiencing from new business and tourism does carry a price-tag, including a major spike in pollution. Just cleaning up the country's drinking water will force the government to shell out $80 billion between now and 2010. Investors who know about these opportunities stand to profit in a big way. And Money Morning Investment Director Keith Fitz-Gerald - a longtime expert on Asian investing - can uncover those profit plays with his specialized investing service. Indeed, he just returned from an investment trip he headed to China, Hong Kong and Japan. To find out more, please click here.]

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