China offers risky drip line to recession-hit Taiwan
TAIPEI (Reuters) - Recession-hit Taiwan has begun to depend so heavily on economic powerhouse China that the island's leadership risks being seen as beholden to Beijing and will have to tread carefully so as not to upset its political rival.
China will send a second major procurement mission to Taiwan in July to buy billions of dollars of goods, while this week Taiwan announced that it will allow mainland money into about 100 sectors in the hope of boosting private investments and consumption, which together make up 75 percent of the island's $380 billion GDP.
"You increasingly see the Taiwan economy dependent on China," said Joseph Cheng, a political scientist at City University of Hong Kong. "The whole idea is that people understand you cannot outrage China."
If relations ever turn sour China could halt or delay key investments, such as those in major infrastructure projects and in the financial sector, but analysts doubt Beijing would ever completely strip its assets.
"They can't completely withdraw all their investments immediately because it will be difficult to just sell off some assets, such as real estate, straightaway, " Alexander Huang, a professor of strategic studies at Tamkang University in Taipei.
"However, if the Taiwan government is expecting Chinese funding for some infrastructure projects, say an airport, and China then decides not to commit, then Taiwan will be scrambling to find new funding, causing a delay in construction."
Despite political differences, China has become Taiwan's top investment destination and trading partner with two-way trade totaling $130 billion.
Last year Taiwan's trade surplus with China was $66.7 billion, which is nearly a fifth of the island's GDP, but its total surplus was only $14.8 billion. That means the island would have run a trade deficit if not for China.
Taiwan officials have estimated that by allowing 1,000 Chinese tourists a day to visit the island would contribute 0.4 percentage points to GDP growth.
RISKS IN CHINESE MONEY
Fresh evidence of China's keenness to invest in Taiwan has appeared almost daily since Beijing-friendly Taiwan President Ma Ying-jeou took office in May 2008 and signed trade deals to open up the tourism and transport sectors.
China Mobile's unprecedented plan to purchase a stake worth over $500 million in Taiwan's Far EasTone (4904.TW) is just the tip of an investment iceberg that could pave the way for similar deals in all but the most sensitive areas.
Taiwan and China also aim to sign a wide-reaching pact to pave the way for more Chinese money to enter the financial sector.
China's Taiwan Affairs Office said in June it would send more purchasing delegations to Taiwan to buy goods to help tide the island over what may prove to be its longest-ever recession. The first such shopping trip in June resulted in deals worth over $2.2 billion.
Such largesse could help ease the pain in Taiwan, where gross domestic product in the first quarter plunged by a record 10 percent from a year earlier. The stock market has already rallied in response to China's overtures, gaining over 40 percent so far in 2009, one of the best performances in Asia.
Even though President Ma Ying-jeou has brought about better ties with Taiwan's giant neighbor, analysts said there could be political risks if a government that preferred formal independence came to power in future.
Analysts said although it was unlikely to expect China to take Taiwan back into its fold any time soon, the issue of reunification was constantly at the back of the minds of Chinese leaders.
"All measures China is taking is to work toward a national unification," Huang said. "The real lethal weapon is money, not missiles."
But some Taiwanese don't mind setting aside hostility toward China as long as the money is good, said Taipei-based political risk consultant Raymond Wu.
"People in Taiwan are very pragmatic," Wu said. "I think people here are very reality-oriented."
(Additional reporting by Jeanny Kao; Editing by Alan Wheatley)
