Taiwan, China in landmark financial services deal

Chairman of China's Association for Relations Across the Taiwan Strait (ARATS) Chen Yunlin (L) shakes hands with Taiwan's Straits Exchange Foundation Chairman P.K. Chiang in Nanjing, Jiangsu province April 25, 2009. Taiwan's chief negotiator on cross-straits relations Chiang arrived in Nanjing on Saturday morning for the third round of cross-straits talks, Xinhua News Agency reported.

NANJING, China (Reuters) - Taiwan and China signed a series of landmark agreements on Sunday laying the groundwork for a flood of financial services investment to flow across the Taiwan Strait for the first time in six decades.

The agreements are the latest sign of warming ties between the former Cold War adversaries under the year-old administration of Taiwan President Ma Ying-jeou, who ran for office promising to improve the economy through closer ties with the mainland.

The centerpiece of the latest cross-strait talks, the third since Ma took office, is an agreement setting up a regulatory framework for financial services firms on both sides of the Taiwan Strait to invest and do business in each others' markets.

The two sides also agreed to gradually set up a clearing system between the Taiwan dollar and China's currency, the yuan.

"This will drive new investment, not just domestically but it will also bring strong interest from foreigners as well," said Standard Chartered economist Tony Phoo. "Even though there's nothing really (unexpected) that came out, it's something positive -- something that's been holding back for too long."

High hopes for both deals have supercharged Taiwan's stock market this year, making it the world's second best performer after only Shanghai. Taiwan stocks are up 28 percent year to date, compared with a 4 percent decline for the S&P 500.

Taiwan's banking and insurance sub-index has rallied 33 percent since the beginning of March alone, with foreign investors pumping a net T$63.2 billion ($1.9 billion) into Taiwan stocks over that period as the island is increasingly seeing as the next big China play.

The talks also included agreement to shift flights between Taiwan and China to scheduled from their current chartered flight status, with the number of weekly flights to rise to 270 from the current 108. A third agreement is aimed at strengthening crime fighting across the Taiwan Strait.

China has claimed self-ruled Taiwan as its territory since the end of the Chinese civil war in 1949 and pledged to bring the island under its rule, by force if necessary. Despite tense ties under former pro-independence President Chen Shui-bian, relations have improved dramatically since Ma took office last May.

All three rounds of negotiations under Ma have been led China's Association for Relations Across the Taiwan Strait, headed by Chen Yunlin, and Taiwan's Straits Exchange Foundation, chaired by P.K. Chiang, both semi-official organizations.

Financial matters aside, the latest dialogue is also politically significant in showing the world that ties will continue to improve across the Taiwan Strait, said Alexander Huang, strategic studies professor at Tamkang University.

"It seems to us there will be a regular dialogue every six months, and that's a good sign because it gives confidence to third parties and foreign governments that both sides can be rational," he said.

The two sides also set out the agenda for the next round of negotiations, which should take place in the second half of this year, including talks on agriculture and fishing issues.

Ma has also been pressing hard for Taiwan to sign a free trade-style agreement with China, known locally as Economic Cooperation Framework Agreement or ECFA.

He has argued that such an agreement is crucial to keeping Taiwan competitive with other Asian governments that have signed similar deals, though opponents in Taiwan say such a deal could make the island too dependent on its larger neighbor.

Maa Shaw-chang, a negotiator for Taiwan at the talks, said the two sides agreed that they can discuss such an agreement at any time, though there is no concrete timeframe.

(Additional reporting by Doug Young and Ralph Jennings in Taipei)