China & Taiwan Make History

Despite being overshadowed by the swine flu news coverage, a major milestone in Taiwan's developing economic ties with China were reached last week, when Taiwan relaxed a 60 year ban prohibiting Chinese mainland investors from buying Taiwanese shares. The two sides have been enemies since Taiwan lost a civil war to Mao Zedong’s communist armies in 1949. Subsequent to the defeat, Taiwan banned any investment from Chinese investors, fearing that foreign ownership would result in the island becoming economically dependent on China.

As evidence of China's growing interest in the island, China Mobile followed the announcement by buying a 12 per cent in Taiwan’s third-largest telecom operator, Far EasTone, for $529 million. Ever since taking over the leadership of Taiwan in May 2008, President Ma Ying-jeou has pledged closer ties to China, and I would expect further investment in the months to come. In fact, there is even discussion of potential reunification, which would be signficantly bullish for Taiwan.

Despite rallying on the news and being up 30% year to date, Taiwan remains over 40% below its highs reached last year. Further, the market trades at a healthy 10x PE. Investors can most easily gain exposure to Taiwan through the iShares MSCI Taiwan ETF (Ticker: EWT). Although I am fairly bullish on Taiwan and believe it represents a cheap way to gain exposure to China, the ETF is highly exposed to the technology industry (as is Taiwan in general), so investors are encouraged to due diligence on the underlying companies. Some of the major components of the ETF include Taiwan Semiconductor, Hon Hai Precision, AU Optronics, HTC, and Cathay Financial. Other Taiwan focused ETFs include Taiwan Greater China Fund (TFC) and Taiwan Fund (TWN).