Enzio's Clock

Background

1. What has happened

This Sunday, 26th April, Taiwan's government concluded its third cross-strait summit with China. Taiwan agreed to allow more mainland investments into Taiwan. This is the first time in 60 years that any mainland institutional investors have been allowed to invest in Taiwan's stock market. (Taiwan's further opening to China is very much what Taiwan's President, Ma Ying-jeou, wanted when assuming office a year ago. Indeed, Pres. Ma has dropped any of the previous pro-independence rhetoric, and created direct flights as well as postal and shipping services as of 15th December 2008.)

This  Wednesday, state-owned China Mobile announced its intention to take a 12% stake in Taiwan's Far EasTone Telecommunications for US$538 million; the deal should be concluded by the end of this year.  As the island's third-largest operator, its shares rose 7% yesterday. 

Yesterday, confirming Sunday's official announcement discussed above, Taipei stated that it would allow qualified domestic institutional investors (QDIIs) from the mainland to buy into Taiwan stocks over 3x more than before. Taipei's Financial Supervisory Commission said that from Monday,China's QDIIs could buy "...Taiwan stocks as long as the investment did not exceed 10% of a listed firm's total market value."(today's South China Morning Post, p. B1). The previous cap was 3%; now it is 10%.

2. Can this change Taiwan's Economic Time®?

Hardly. We agree that with mainland companies now being allowed (officially) to invest in Taiwan for the first time in 60 years, the "feel good" factor of more money pouring in will create short-term euphoria. Besides, plenty of punters will be buying Taiwanese companies which they hope will be bought into by the mainland's QDIIs. 

But, we never has heard that takeovers create employment; quite on the contrary. Besides, the global Economic Time is bad, and global unemployment is set to worsen and then stay stuck in a rut for a long time. That will thwart Taiwan's pervasive export machine, and thus the creation of local jobs.

Also, don't forget that many Taiwanese still harbour deep suspicions towards their mainland compatriots - not dissimilarly to the West Germans' fundamental view of the East Germans....

So, our conclusion is that the overall macro effects cannot materialize.

3. Key sectors

It seems like the key sectors that mainland QDIIs will target are technology and steel, along with any other large-cap, quoted companies.

Concerning technology, we just noted the Far EasTone telecoms deal. On top of this, many politicians in Taiwan's opposition party, the Democratic Progressive Party (DPP) fear that China's state-owned companies will "hollow-out" Taiwan's technology sector. I hardly think so: they can buy up to a maximum 10% stake. However, that the DPP is voicing this concern underlines that China's companies will be targeting Taiwan technology sector.

Taiwan's  steel shares moved strongly after the mainland's second largest iron ore trader, SinoSteel Corp., announced that it will visit Taiwan this month to seek investment opportunities. 

4. How to Make Money Off This Idea

1. Always consult your financial adviser first.
2. Have a look at one ETF that allows you to buy into the overall Taiwan market, 2837:HK.  It is the Lyxor ETF MSCI Taiwan
3. If you want to play the short-term story, then buy into Taiwan's largest cap stocks: not only are they the ones that will be bought by global fund managers. These large caps also are the ones that will be targeted the most by China's state-owned firms. 
4. Two sectors worth looking at are technology and steel. Concerning technology, you might want to look at one ETF, 0052:TT, "Fubon Taiwan Technology Fund", which tracks the TSEC Taiwan Technology Index.