Taiwan: Gateway to China
Everyone knows that China is emerging rapidly as an economic superpower. Chinese economic growth has averaged over 9% for two decades. The middle class there now numbers over 100 million, and its ranks are swelling rapidly. And there is really no long-term impediment to China, or for that matter most emerging markets, from continuing to churn out increasing numbers of middle class consumers. Indeed, the economic story of the 21st century may well be the creation of a burgeoning middle class in most emerging markets, and an equalization of standards of living worldwide. But how can we invest in China? Do we simply invest in the shares of companies listed on Chinese stock markets?

For now, the answer has to remain a resounding 'NO!'. I have never invested directly in China for several critical reasons. There is a general lack of recognition for shareholder rights. Neither corporate governance nor accounting standards are up to developped-country standards. Information is sparse, and corruption endemic. Transparency International's 2005 survey of World Corruption ranks China a poor 78th in the world. And the legal system is not particularly friendly to foreign investors.

Chinese exchanges are littered with dying enterprises controlled by local and national governments. I personally don't find the idea of being a partner with the Chinese government a particularly appealing scenario for either me or my clients.

Non-tradable state-owned shares account for about two-thirds of equity capital in companies listed on China's two domestic bourses.

Although Chinese corporations increasingly are modernizing management and seeking to meet international standards as they invest and issue shares overseas, party officials still call the shots in many strategically important industries…. recently efforts have turned to cleaning up corruption and dodgy dealings at 181 major companies under state control, with officials complaining that many corporate managers have been caught misusing power, embezzling assets or taking bribes.

Taipei Times, Saturday, Apr 16, 2005, & , Thursday, Jan 27, 2005

What we need is a safe means of investing in China. We need companies to be reasonably priced, professionally run, and conduct themselves according to generally accepted business practices, especially with regards to the treatment of shareholders' rights. The answer is Taiwan. Taiwan is so interlinked with the Chinese economy that by investing there, you effectively are investing in China. Some interesting facts:

China is Taiwan's largest trading partner, taking 37% of Taiwan's exports, which have grown a resounding 500% since 1991.
70,000 Taiwanese companies operate in mainland China, and an amazing 70% of Taiwanese companies have operations in China.
As of 2003, Taiwan companies have invested a staggering US$ 250 billion in China.
7 out of 10 of China's largest investors are from Taiwan.
Taiwan-owned companies employ over 10 million workers in China.
70% of communication and information technology exports from China are produced by Taiwan-owned companies.
1 million Taiwan citizens live in China, 300,000 in Shanghai alone.
Taiwan produces more than two-thirds of the globe's LCD monitors, nearly three out of four notebook PCs, and four-fifths of PDAs.

Taiwan is the great investor of Asia, investing in difficult countries and somehow, by hook or by crook, establishing themselves and profiting. Taiwan is a major investor in Viet Nam, and elsewhere in Asia. And in terms of economic stability, Taiwan is in a unique position. Amazingly, with a population of only 23 million, Taiwan has huge foreign reserves of over $250 billion - 3rd largest in the world! China's population is almost 50 times higher than Taiwan's, but their foreign reserves are only 3.4 times as big. By way of comparison, Canada's foreign reserves are a modest $33 billion.

Not that Taiwan is a slouch when it comes to manufacturing. There are plenty of products made there, such as laptop computers and LCD screens. But when it comes to taking advantage of lower manufacturing costs elsewhere, Taiwanese companies have no rival.

Corporate governance in Taiwan is far better than in China, there is less corruption, a better and fairer legal system, and better protections and safeguards for investors. The most recent 'Opacity Index' rates Taiwan a relatively transparent position #19 worldwide, China, #44. Many Taiwanese companies are listed on overseas exchanges.

What about the political tensions with China? There is persistent fear concerning Taiwan because of the political problem of dealing with the China reunification issue. But beneath the rhetoric on both sides lies the reality that China and Taiwan need each other. There is the beginning of a realization within Taiwan that the possibility of reunification with China in, say 30 - 50 years, need not be considered taboo. China seems to consider this an important step forward.

But most importantly, Taiwan stocks are cheap. According to Bank Credit Analyst Research, Taiwan's stock market is the third-cheapest in the world, trading at valuations less than a third that of Canada and the US. In much the same way as Hong Kong stocks fell to extremely cheap levels prior to reunification, only to soar once reunification was accomplished, Taiwan stocks may follow the same path. Recent movements seem to suggest this.

If you are interested in learning more about investing in Taiwan and other exciting emerging markets, feel free to call me at 905-704-6650. I have over 18 years experience in the financial services industry, both in Canada, and overseas in Singapore and London. Together we can discuss the potential merits and suitability for your portfolio.

Sincerely,

Scott Swallow, HBA, MBA, CIM