Political risk picture brightens in northeast Asia

By Alan Wheatley, China Economics Editor - Analysis

BEIJING (Reuters) - Like a dull toothache that eventually just goes away, political risks that have long dogged northeast Asia are on the wane, brightening the region's economic outlook.

In Taiwan in particular, investors are betting that Saturday's presidential election will usher in warmer political ties and stronger economic links with China, a prospect that has helped the Taiwan dollar and the Taipei stock market outperform their regional counterparts so far this year.

"There's a free lunch to be had there given that candidates on both sides are going to support a rapprochement with China. The market is pricing in a positive surprise," said Dominique Dwor-Frecaut, an economist with ABN AMRO in Singapore.

Freeing up the movement of people, goods and capital -- all held hostage to Taiwan politics -- would give a timely boost not only to the self-ruled island's economy but to the entire Asian supply chain at a time of deepening gloom in the United States.

"We would potentially change our view on Taiwan purely because of the geopolitical dynamics," said a Singapore hedge fund manager who declined to be identified in keeping with his firm's policy.

Frontrunner Ma Ying-jeou from the Nationalist Party (KMT) has set out a broader liberalization agenda than his rival, Frank Hsieh from the pro-independence Democratic Progressive Party.

The KMT's proposals for increased tourism from China, more cross-Strait charter flights and an easing of controls on corporate investment in the mainland would all raise Taiwan's economic efficiency, said Grace Ng at JPMorgan in Hong Kong.

"Similarly, private consumption growth, which has consistently lagged employment and household income growth in recent years, could potentially stage a meaningful, sustained upturn, as consumer sentiment and overall confidence in the medium-term outlook for the economy gradually recover," she said in a recent report.