For my last update on this short trip, I’m writing to you from one of my favourite cities. Taipei is unlike anywhere else in Asia – or probably the world for that matter.
It’s not the most attractive city in terms of architecture, but it has a certain charm and character. The neighbouring mountains are striking. The food is famous for combining local traditions with influences from around the globe. The atmosphere is friendly, the nightlife and culture lively. And the infrastructure increasingly makes London look like a bad joke.
I like to drop into Taiwan for at least a few days most times I’m in Asia. And not just because it’s always a pleasant way to end a long trip. I also think that this oft-overlooked market could be one of Asia’s most interesting long-term stories…
Taiwan has come much further than you’d think
Taiwan is much-misunderstood – to the point that many Westerners confuse it with Thailand, as this recent BBC story notes. So some people may not realise quite how far this island has advanced in the last few years.
If your image of the country is of “made in Taiwan” stickers plastered on cheaply-made plastic goods, as I remember from my childhood, it’s a couple of decades out of date. Today, Taiwan is one of the most technologically advanced economies on the planet.
Taiwanese companies such as semiconductor foundry TSMC design and make many of the most advanced components that go into modern electronics. And increasingly, firms such as HTC, Acer and Asus are taking the next step up the value chain and establishing themselves as consumer brands in their own right.
In stockmarket terms, Taiwan is still classed as an emerging market. This is down to market access issues such as settlement times, stock lending rules and currency market limitations.
But as an economy, this is a fully developed country. In fact, in purchasing power parity terms – which adjusts for the difference in the cost of goods and services between countries – its GDP per capita is on a par with Japan’s, as the following chart shows.
The country doesn’t look as wealthy at market exchange rates, as you can see below. This reflects the way that it holds down its currency (in common with many other Asian countries). On the plus side, this makes it a very cheap destination for foreign visitors – in sharp contrast to my stay in Singapore a few weeks ago.
One of development’s biggest success stories
That makes Taiwan a real rarity: one of the world’s true development success stories.
The fact is that if you look at which economies could be called developed countries a century ago and compare it to today’s list, you’ll probably be shocked by how little has changed.
Two countries have actually gone backwards. Argentina and Chile were considered developed markets in 1900. But today Chile is an emerging market and Argentina has just been demoted to frontier status. (Although I don’t know enough about the history of these two to know whether the standard of living in either at that time really matched up to that in developed economies elsewhere.)
Japan underwent decades of rapid growth to become the world’s second-largest economy in the latter half of the century. But of course, Japan was already a developed economy prior to World War II. So this was rebuilding rather than developing from scratch, just as much of Europe also had to rebuild.
Singapore and Hong Kong also lifted themselves from being poor colonial outposts to major manufacturing, trade and financial centres. Again, these were impressive feats. But as city states that happened to be deep-water ports on major trade routes, their experience is not typical of most countries.
That leaves two examples of countries going from poverty to advanced economies: South Korea and Taiwan. In doing so, both have overtaken other countries such as the Philippines – which was the second-richest country in Asia after Japan in the 1950s – and Malaysia, which has risen to middle income status but has not progressed as fast as it should have, due to faulty government policies.
A robust democracy that’s cleaning up the environment
Taiwan and South Korea also have something else in common: politics. Both began developing as dictatorships with a terrible record on human rights. Today, they are among Asia’s most robust democracies.
Politics in both countries are raucous and strongly contested. Right now, Taiwan is in the midst of elections, as it usually seems to be when I visit. I’m starting to wonder whether this is just a fluke or whether campaigning now goes on 365 days a year.
The streets are full of lifesize posters of candidates trying to strike poses that project the right blend of optimism, dynamism and honesty (persistent high-level corruption is one of Taiwan’s ongoing issues). As you walk around, you’re passed by an endless stream of colourful vans like the one below, all blaring the merits of their candidates through loudspeakers.
Taiwan and Korea both suggest that democracy is not a prerequisite for development. But as a middle class emerges, the pressure for representation becomes harder to resist. This is of course, directly relevant to China today.
It’s a similar story when it comes to the environment. When the country was poor and industrialising, no-one cared enough about this – one MoneyWeek writer says that his main memory of visiting Taipei many years ago was the appalling pollution.
But as the country became richer, public pressure to clean up mounted. Today, conditions are pretty good in much of the island, helped by the exit of much low-end manufacturing to China. Compare the shot across the river in Guangdong in my trip last week with a shot of Taipei 101 from the outskirts of the city.
The experience here and elsewhere suggests the same will eventually happen in China.
Relations with China are an opportunity as well as a risk
The big shadow over Taiwan is its political situation. I’ve written about this many times before, so I won’t rehash it all again. In brief, while Taiwan is fully autonomous, China views it as a renegade province that eventually should be reunited with the mainland.
Few foreign countries grant it formal diplomatic recognition. They maintain relations through fudges such as “trade missions” and “cultural institutes” that serve as de facto embassies. And while the US doesn’t officially recognise it as a sovereign state, it is committed to intervene if China tries to take back the island by force.
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Despite this, business ties between China and Taiwan are extensive. Many Chinese factories are owned and run by Taiwanese businessmen. Diplomatic discussions between the two sides take place through semi-official organisations such as the Straits Exchange Foundation and the Association for Relations Across the Taiwan Straits.
Since the election of president Ma Ying-jeou on a more pro-China platform in 2008, relations have been improving. Agreements on freer trade, investment tourism and direct flights have all been signed in the last couple of years.
Still, Taiwan-China relations are obviously a very contentious issue. Ma’s Kuomintang (KMT) wants to improve relations further, while the opposition Democratic Progressive Party (DPP) is against this. Some in the DPP would like to declare formal independence (China has threatened to invade if this happens).
I’ve had some quite aggressive responses when I’ve written about this in the past. I have a great deal of sympathy for those Taiwanese who feel that they should be officially recognised as an independent country by the rest of the world. But frankly this is unlikely to happen. And trying to call China’s bluff over military action would be very unwise.
What’s more, economically speaking, the country is already highly dependent on the links with its giant neighbour. This shall only increase in the years ahead. Taiwan has the choice of being isolated, or using its unique relationship with China to its advantage. Wisely it seems to be pursuing the latter course. And the effects of this should become very evident in next few years – especially with what’s going on just across the straits.
Time to look across the straits again
As the map below shows, Taiwan lies directly across from Fujian province. As a coastal province, this is one of the wealthier parts of China. But it has lagged behind other coastal regions such as Guangdong, Zhejiang and Jiangsu in recent years.
Taiwanese firms were major investors in Fujian as China first began to open up to capitalism again. But later on, they diverted more and more of their spending into other provinces, while Fujian has fallen out of favour. In 1991-2009, it took in US$5.8bn in Taiwanese investment, against US$27.9bn in top-ranked Jiangsu, according to data from Standard Chartered.
But about a year ago, Beijing announced plans to speed up development in Fujian. These mostly focus on substantial investment in infrastructure in the hope that better transport links would attract manufacturing investment. This is no coincidence. China’s strategy is to bribe itself into favour in Taiwan. Fujian is being dangled as a very large carrot.
I’ve written before about how manufacturing shifted out of Hong Kong into Guangdong in the eighties and nineties, to the ultimate benefit of both sides. There are two obvious places in Asia where this strategy can be replicated today.
One is shifting manufacturing from Singapore into southern Malaysia, as I touched on a couple of weeks ago. The other is closer links between Taiwan and Fujian.
Fujian wants local manufacturing to catch up with rival provinces. But having seen what’s happened to the environment in China so far, it would probably like this process to be cleaner if possible. The port city of Xiamen in Fujian is generally regarded as the least polluted major city in the country.
That would argue for a focus on higher-tech industries such as IT, electronics and biotechnology. That’s exactly what’s stressed in the government’s development plans. By a happy coincidence, that’s what Taiwan has R&D expertise in, or would like to develop.
The contrarian way to play China
So over the next few years, it’s likely that Taiwanese investment in Fujian will pick up strongly. This will obviously benefit Taiwanese manufacturers who can take advantage of low costs there.
But if all goes well, we should see more complementary investment in R&D and high-end technology in Taiwan, from domestic, Chinese and foreign firms. If the Hong Kong-Guangdong model holds, Taiwan’s economy should evolve more towards skilled services working with semi-skilled manufacturing on the mainland.
The effects should be broad-based. Even industries such as steel and chemicals in Taiwan could benefit from higher demand in Fujian at the same time as tariffs on cross-straits imports are cut. Taiwanese banks and financial services should also have an advantage in entering the mainland market.
More widely, tourism, healthcare, logistics and real estate are among many industries that should benefit from better trade and investment links with China. For example, visitors from the mainland to Taiwan are still rising strongly since the first tour parties were permitted in mid-2008. They rose 65% year-on-year in September. Plans to relax restrictions further should see this continue.
I’ve long argued that Taiwan is a good way to invest in China – almost a contrarian way if you only look at the headlines. Beyond the threats, the situation offers many opportunities. While corporate standards in Taiwan could still be improved, you usually get better governance and transparency when investing with Taiwanese management than with mainlanders.
On a p/e of 14.5 and with a dividend yield of 3.4%, the Taiwanese market still looks good value. It is tech-heavy, so cyclical and volatile. There are risks, including politics. But overall, I think anyone who is investing in China should put some of their money here.
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