Taiwan's Tiger Woos China's Dragon

The election picture in the U.S. may still be cloudy, but the results of Taiwan's weekend elections have investors cheering. After eight years of tension, the decisive outcome in Taiwan favored rapid rapprochement with China, pushing Taiwan's markets sharply higher.

Once a leading Asian tech tiger, Taiwan lost its roar in the 2001 tech meltdown. To make matters worse, the government it elected in 2000 openly challenged Beijing's plans to assimilate it under its "One China" strategy. China responded with military threats and systematic political isolation to prevent it from asserting independence. As a result, Taiwan missed out on Asia's recent boom. Since 2000, Taiwan's market is down slightly, compared to the 20% gain of the MSCI Asia Pacific Index.

Harnessing the dragon
China is already Taiwan's largest trading partner, with nearly $125 billion in bilateral trade. Although Taiwan restricts its companies from putting more than 40% of their net value into China, many of its companies have invested in the mainland. GigaMedia (Nasdaq: GIGM ) has an Asian online games segment focused on China. AU Optronics (NYSE: AUO ) assembles thin film transistor liquid crystal display panels in Suzhou, China. Taiwan Semiconductor (NYSE: TSM ) has a wholly owned subsidiary operating a semiconductor wafer fabrication facility in Shanghai, China.

The newly elected president is promising sweeping changes to help Taiwan harness China's potential. He plans to allow direct flights between the two countries, replacing a tedious detour, and lift restrictions on Taiwanese companies' China investments. In the process, he's hoping to deliver on his "633" plan, which targets 6% economic growth, a 3% jobless rate, and per-capita GDP of $30,000. With current figures of real GDP growth at 4.7%, a jobless rate of 3.95%, and per-capita GDP at $16,130, Taiwan will have some work to do to reach those goals.

Will the dragon bite?
No matter how tempting the Taiwan bait, it remains to be seen whether the China dragon will bite. In a terse statement responding to the election results, a Chinese Foreign Ministry spokesman reiterated the mainland's position: "There's only one China in the world and Taiwan is an inalienable part of Chinese territory."

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