Made in Taiwan: 3 Funds for the Next Asian Market Bubble

By Tom Dyson

Flights between China and Taiwan began this weekend. The first plane flew from Taiwan to China on Saturday morning and returned one hour later. China Airlines, the largest Taiwanese carrier, operated the flight.

Saturday’s flight marks the first direct scheduled flight between China and Taiwan in 59 years.

In 1949, Taiwan banned direct flights with China. Taiwan used to be part of China. But in the 1940s, China had a communist revolution. The losers of the war – the business and intellectual elite – fled to Taiwan and broke ties with mainland China. Officially, China and Taiwan are still at war.

In March, a new president won power in Taiwan. This new president wants to mend Taiwan’s relationship with China… and eventually unify the two countries. This was the basis of his election platform. Restoring transport links between the two countries was his first step.

Starting on Saturday, 36 flights will connect Taiwan and China every weekend. Several airlines – from both Taiwan and China – will fly between different Chinese and Taiwanese airports.

Here’s the thing: When the losers of the revolution in China came to Taiwan in 1949, they took over Taiwan by force, imposed martial law, banned all political parties except their own, restricted the press, and put large tariffs on foreign imports and luxury goods. Then they built an aggressive export economy like Japan’s.

The aim of these policies was to make Taiwan rich. And they worked. By 1987, Taiwan had the fourth-largest stash of foreign exchange reserves in the world, after the U.S., France, and Japan. Taiwan had almost as much foreign reserves as Japan… even though Japan’s population was six times larger. In 1987, the typical citizen of Taiwan saved 31.2% of disposable income (vs. 16.6% in Japan and 3.2% in the U.S.).

In 1987, a new president won power in Taiwan… the first native Taiwanese to head the government. The new president started loosening regulations. He encouraged citizens to buy luxury American goods. He freed the press. He allowed opposition political parties to compete for power. He let Taiwanese citizens send money abroad. And he let Taiwanese citizens travel to China to visit relatives… for the first time since the revolution.

The Taiwanese stock market loved these new policies. Between 1987 and 1990, Taiwan had one of the greatest stock market bubbles in history. Taiwan’s market rose from 1,100 to 12,054… a gain of 991%… and the Taiwanese currency rose another 40%. Foreign investors would have made 14 times their money in just three years by investing in Taiwan.

Now I think we’re about to see another huge rally in Taiwanese stocks. Since 1990, Taiwan’s stock market has been the worst-performing major stock market in the world, except for Japan. Today the index is at 7,523. That’s a fall of 38% from 1990 levels.

The new president is freeing up regulations between Taiwan and China. Transport comes first. Capital regulations will come next. Taiwan’s new president has said he wants to help Taiwan’s financial industry go to the mainland. Hong Kong’s stock market rose 55% in 10 weeks last year after Hong Kong opened its markets to Chinese investors in August 2007.

I don’t think the Taiwanese stock market will rise 990% again… but I do think it’ll double over the next couple of years. The Taiwan ETF (NYSE: EWT) is the easiest way to invest in Taiwan. It pays a 2.75% dividend.

There are also two Taiwan closed-end funds: The Taiwan Fund (NYSE: TWN) trades at an 8% discount and pays a 2.75% dividend. The Taiwan Greater China Fund (NYSE: TFC) trades at a 10% discount and pays a 0.16% dividend.

Comments

[mmbc:]

Nice article, good historical coverage on Taiwan and its economy.

For relative performance (rankings/signals) on these EWT, TWN, TFC you can visit my ranking and signals page
www.maxmoneyblog.com/b...
and here
www.maxmoneyblog.com/b.../

2008 Jul 08 11:00 AM

[proseadvocate:]

I just don't understand why Taiwan would encourage reunification, which is never addressed in the article. Since they did so well on their own, what's in it for them to become dominated by the mainland?

2008 Jul 08 02:39 PM

[frdm45:]

The party with power in the Taiwanese legislature and now the presidency is the KMT; they are not encouraging reunification, they are just stepping back from the pro-independence policies of the former president Chen Shui Bian and his party. The KMT stance on reunification is and has been for a while: they will consider it if the mainland becomes a fully democratic nation, which is unlikely to happen in the near future. The KMT default position while the Mainland remains communist is to keep the status quo, that is not to push for independence nor to acquiesce to the Mainland's calls for reunification, and increase trade and travel links which benefit both countries. I agree with the premise of the article that the new administration will bode well for the economy of Taiwan, with the caveat that if for some reason hardliners in the PRC can hijack the agenda of the politburo they will push to advance the reunification timetable (and I think the chance of this has decreased with the election of the new Taiwanese president Ma Jing Jou).

2008 Jul 08 03:46 PM

[GMiki1:]

Jim Rodgers expressed a strong interest in Taiwan recently, as did an Asian-based trader on Bloomberg, whose name I didn't pay any attention to. I have a small investment in one of the funds, just because. It's my only investment outside of natural resources, gold and silver.

2008 Jul 08 04:46 PM

[vitaminc:]

Without going into the political discussions, much of Taiwan's new exports are in outsourcing electronic related design and productions. All those companies will feel sharp pain from sluggish US and Western Europe economies.

But long-term speaking, Taiwan will greatly benefit from taking a more open stance on globalization.

2008 Jul 08 08:02 PM

[User 225251:]

taiwan is part of china!!!

2008 Jul 11 08:31 PM

[User 225251:]

taiwan is part of china! it belongs to china1

2008 Jul 11 08:35 PM

[Michael Turton:]

Hi Tom! Good to see you writing about Taiwan.

+++++
In March, a new president won power in Taiwan. This new president wants to mend Taiwan’s relationship with China… and eventually unify the two countries. This was the basis of his election platform. Restoring transport links between the two countries was his first step.
+++++

The new President, Ma Ying-jeou, is from the KMT, the party that lost the civil war.

+++++
Starting on Saturday, 36 flights will connect Taiwan and China every weekend. Several airlines – from both Taiwan and China – will fly between different Chinese and Taiwanese airports.
+++++

Right. However, Chinese tourists can only travel on Chinese aircraft.

+++++++++++++
In 1987, a new president won power in Taiwan… the first native Taiwanese to head the government.
+++++++++++++

Lee Teng-hui did not become president until Jan of 1988.

++++++
The new president started loosening regulations. He encouraged citizens to buy luxury American goods. He freed the press. He allowed opposition political parties to compete for power. He let Taiwanese citizens send money abroad. And he let Taiwanese citizens travel to China to visit relatives… for the first time since the revolution.
+++++++

All this began before Lee, although Lee expanded and consolidated these trends.

++++++
The Taiwanese stock market loved these new policies. Between 1987 and 1990, Taiwan had one of the greatest stock market bubbles in history. Taiwan’s market rose from 1,100 to 12,054… a gain of 991%… and the Taiwanese currency rose another 40%. Foreign investors would have made 14 times their money in just three years by investing in Taiwan.
++++++++

Yes, I was living in Taiwan at the time. Money practically walked up to you on the street and begged you to take it home...

++++++
Now I think we’re about to see another huge rally in Taiwanese stocks. Since 1990, Taiwan’s stock market has been the worst-performing major stock market in the world, except for Japan. Today the index is at 7,523. That’s a fall of 38% from 1990 levels.
++++++++

The bubble was pricked and since then the market has been flat. At present it is at a 20 month low and probably headed down. The market does not perform well because Taiwan's companies are not shareholder responsive, are not transparent, do not use it as a source of funding, and other issues. The market is not in a "huge rally" but in a state of collapse at the moment. It does not appear to have a bottom, falling 322 points to 6834 today. Ugh.

+++++++++
The new president is freeing up regulations between Taiwan and China. Transport comes first. Capital regulations will come next. Taiwan’s new president has said he wants to help Taiwan’s financial industry go to the mainland. Hong Kong’s stock market rose 55% in 10 weeks last year after Hong Kong opened its markets to Chinese investors in August 2007.
+++++++

That was before the sub-prime mess, etc. President Ma's economic team is mired in 1970s policy solutions, and Ma himself is weak, not good at working with others, and despised by the elites of his own party, who carry on backchannel negotiations with China behind his back.

The negotiations on cargo links and other things Taiwan needs are not due out until the fall. The regulations that permit Taiwanese firms to invest in China may help individual firms but do nothing for Taiwan. I'd wait to see whether the market rallies before investing in Taiwan.

Michael

2008 Jul 15 02:25 AM