Imagine if Fidel Castro’s successor decided the U.S. was not the enemy and opened up Cuba’s economy to direct trade and investment with the U.S. It would be like turning on the lights, after years of darkness. Replace Fidel Castro with Chen Hsui-Bien, the island of Cuba with the island of Taiwan, and the superpower of the U.S. with the superpower of China, and just such a situation is shaping up to occur in Asia. The Kuomintang party's landslide legislative win in Taiwan significantly increases the possibility that on March 22, Ma Ying-Jeou could be elected successor to Chen Hsui-Bien as Taiwan's President. If he succeeds, it is likely that a host of barriers to closer economic ties between mainland China and Taiwan will fall by the wayside.

Firstly, it is likely that direct flights between Taiwan and mainland China will be inaugurated, cutting travel time between Taiwan and Shanghai from an entire day’s affair to perhaps 2 hours (cutting out an inefficient stopover in Hong Kong). Investment rules limiting Taiwanese corporate investment in China would likely be relaxed, allowing China subsidiaries of Taiwan corporations to return to list shares in Taiwan rather than being forced to take their business to Hong Kong. Taiwanese banks would likely finally be allowed to make investments in China. In addition, mainland Chinese investment and even tourism into Taiwan has been restricted under the current government. Mainland Chinese tourism alone added 3.2% to Hong Kong’s GDP in 2006 and mainland stock listings and investment have made large contributions to Hong Kong’s recent economic success. As a first step, rules restricting the number of mainland tourists to Taiwan would likely be relaxed under a new Kuomintang government.

China's government recently announced further measures to control the rising price of some foods. Under the new measures, large producers of some foods (including dairy, pork, mutton and eggs) must seek government approval if they wish to raise prices. Wholesalers and retailers are under no such restriction, but must notify government officials of price changes when they reach certain levels. The price controls are meant to be a temporary measure.

China has been targeting asset price inflation (and perhaps food price inflation) through tighter monetary policy. Food price inflation is different than property price inflation because food prices affect the poor the most, given that food costs account for a higher percentage of the poor's income. As a result, food prices are a major concern of China's large rural population, where property bubbles in Shanghai or Beijing are not.

Last week, policymakers in Beijing, concluding an annual Central Economic Work Conference, decided to shift their monetary policy stance from “prudent” to “tight” next year. In line with the new policy stance, China’s central bank raised its reserve ratio requirement to 14.5%, a 1% increase and a 20-year high. Previous increases in the ratio had been much smaller, usually 0.5%. We would expect that a rise in lending rates is not far behind. China’s moves come just as the U.S. is expected to continue to loosen its monetary policy, with the Federal Reserve Board meeting today and most market watchers forecasting a further decline in the fed funds rate.

What are the implications of this? For one, it does seem that China’s policymakers are getting more serious about preventing overheating of the Chinese economy. They aim to bring China’s rate of economic expansion down to sustainable levels over the medium-term rather than risking a burst of short-term growth, followed by collapse. With tighter economic policy, we would expect money supply growth, including bank lending, to slow and, with that slowing, the potential for asset price growth also slows.