Asian Tigers Revisited: The “Other China”

Economically, Taiwan is the success story that mainland China could have been — absent the millstone of 60 years of Communism. While most resource-rich countries like Brazil and Russia pump finite natural resources out of the ground to turbocharge their economies, Taiwan has accumulated its breathtaking, $348 billion in foreign currency reserves — the fourth-highest total in the world — the old-fashioned way. Taiwan earned it. Had mainland China (population: 1.3 billion) been as efficient as tiny Taiwan (population: 23 million) in accumulating dollar reserves, China’s reserves would stand at $19.66 trillion — an amount almost 40% more than the entire U.S. gross domestic product (GDP).

Understanding the dynamics behind Taiwan’s remarkable success — as well as its strong prospects — just might alert you to one of the most profitable global investment opportunities over the coming decade.

The “Other China”: Relations with Mainland China

Taiwan has been independent for 60 years since the end of a civil war with China in 1949. American-inspired land reform, aid and investment, and free universal education helped turn it into one of the four original “Asian Tigers,” widely admired for their economic achievements. Thanks to both hard work and a market economy, Taiwan today boasts the world’s second-tallest building and its high-tech industry rivals that of the Silicon Valley.

For all its individual achievements, mainland China views Taiwan as a renegade republic. Yet, for two sworn political enemies, Taiwan and China could hardly be closer. Indeed, the Chinese and Taiwanese business and political communities exist in parallel, non-overlapping universes. Mainland China is Taiwan’s No. 1 export market, with nearly 40% of its exports going to China. Trade between mainland China and Taiwan reached $120 billion in 2008. And mainland China has attracted more than two-thirds of Taiwan’s foreign investment. More than 70,000 Taiwanese companies have invested $120 billion in mainland Chinese businesses since the early 1990s. Taiwanese companies employ some 10 million people in China. More than 300,000 Taiwanese businessmen and their dependents now live in the greater Shanghai area alone. The next time you see “Made in China” on your new computer, realize that the profits are probably going into capitalist Taiwanese coffers.

The “Other China”: The Time Is Now

Relations between Taiwan and mainland China have improved dramatically with the election in Taiwan of a pragmatic new president Ma Ying-jeou, of the opposition Kuomintang (KMT) party, in 2008. Within three months of Ma Ying-jeou’s election, direct flights between China and Taiwan resumed for the first time since 1949. Mainland China agreed to halve the number of missiles that it has pointed at Taiwan from 700 to 350. Taiwan and China agreed to end a ban on Chinese investments in Taiwan for the first time in 60 years.

A report published by the Ministry of Communications in 2004 makes plans for a highway from Beijing to Taipei, Taiwan, to be completed by 2030. The technical challenges of crossing the 94-mile Taiwan Strait aside, the document fails to discuss the even bigger political problem of reaching an agreement with Taiwan. But in Chinese officials’ minds, Taiwan’s reintegration into China is a question of “when” and not “if.” And that spells the biggest re-rating opportunity in all of Asia.

The “Other China”: Putting Money in Your Pocket

Unlike South Korea, the Taiwanese stock market has not been a terrific performer over the past decade, under performing even the anemic S&P 500. Ironically, that all changed during the Great Recession, which coincided with a warming of relations between Taiwan and China.

While the U.S. markets have had quite a run since last March, Taiwan has outperformed over the last 12 months by almost two-to-one.

And if you want evidence of a global economic turnaround, look no further than Taiwan. Its industrial output soared an eye-popping 47.34% in December as the island exited its worst-ever recession.

The bottom line? The once-in-a-lifetime, re-rating opportunity of “the other China” might be one of the top opportunities of the coming decade. That’s also why I have invested in the iShares MSCI Taiwan Index (EWT) for my clients at my investment firm Global Guru Capital. And now there is no reason why you can’t do the same.

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