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

[Editor's Note: Money Morning Investment Director Keith Fitz-Gerald is one of the world's leading experts on Asia, especially China. Right now, Fitz-Gerald is leading an investment tour of the Red Dragon, and he'll be sending along regular investment travelogues to update Money Morning readers on his latest observations. Fitz-Gerald previously wrote about how China is capitalizing on the global financial crisis.]

By Keith Fitz-Gerald

Investment Director
Money Morning/The Money Map Report

FENGDU, People's Republic of China
- Mainland China companies will soon be able to invest in Taiwan for the first time in 60 years, thanks to investment accords reached between the Association for Relations Across the Taiwan Straits (ARATS) the Straits Exchange Foundation (SEF).

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.

[Editor's Note: Today's issue of Money Morning features two stories related to this one. In the first, accessible by clicking here, Contributing Editor Martin Hutchinson details three Taiwan profit plays that investors might want to consider. In the second, Investment Director Keith Fitz-Gerald continues his investment travelogue from China, detailing the lessons that can be learned from the Three Gorges Dam project, which he just visited. For that additional installment to Fitz-Gerald's "View From China" series, please click here. The additional stories are all available free of charge.]

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About the Author

Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.

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