China tourists, dollars could charm, alarm Taiwan

By Doug Young - Analysis

TAIPEI (Reuters) - Two decades after letting its people and companies go to China, Taiwan is opening itself to Chinese investors and visitors -- a move that could carry big economic dividends but also one fraught with political risk.

By opening itself to a flood of Chinese tourists and investment dollars, Taiwan is exposing its markets, economy and political and social systems to huge influence from its much larger neighbor and political rival.

Some forecast the injection of new activity could boost Taiwan's laggard economy by as much 2 percentage points. But lack of progress or a backlash if change occurs too quickly could also undermine the new China-friendly government.

"There will be some initial apprehension when mainland capital comes in to buy real estate, business or other things," said Wu Ray-kuo, managing director of risk consultancy at Fu-Jen University.

"After that, it will depend on how the mainland capital is used. If all these control relaxations don't lead to the desired result, there could potentially be public backlash."

Since President Ma Ying-jeou took office in May, his administration has announced a steady stream of initiatives aimed at opening Taiwan to Chinese and their investments, ending six decades of prohibition.

The first of those, a landmark tourism deal in June, could result in up to $3.2 billion in additional tourism spending each year, adding 0.8 percentage points to Taiwan's gross domestic product, BNP said in a July research note.

Since then, Ma's administration has discussed or announced plans to open Taiwan's stock, real estate, infrastructure and manufacturing markets to China in the near to medium term.

In the longer term, Ma has also talked up the idea of creating a Greater China common market modeled on Europe.

BIG BENEFITS

The potential benefits to Ma's initiatives are economic, designed to help Taiwan share in China's rapid economic growth, which has averaged more than 10 percent in recent years.

If handled properly, allowing Chinese consumers and investors into Taiwan could add up to 2 percentage points to Taiwan's economic growth, Roth Capital Partners forecast in April.

"We believe globally oriented investors have not yet sufficiently focused on the improved long-term opportunities that Taiwan represents," Roth said in a note at that time.

JP Morgan economist Grace Ng said the extra boost could be as high as 1 percentage point, citing Hong Kong as an example of what could happen.

GDP growth in the former British colony shot up to the 6-7 percent range from previous rates closer to 4 percent after it opened its doors to large numbers of Chinese tourists in 2003.