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Cross-strait relations and the politics of big business

"My guess is that it'll now be a couple of years before we see any progress [on direct air links with China]."

Taipei analyst

Never mind all those chipmakers in Taiwan that are lowering their profit forecasts as chip prices skid, Mosel Vitelic Inc (茂矽) and ProMos Technologies Inc (茂德) being the latest. It's true that computer and technology stocks account for 60 percent of the Taipei stock exchange's capitalization, but there's a deeper malaise in the country's normally lively market. Call it the China syndrome if you must.

President Chen Shui-bian (陳水扁) started it all in his "on country on each side" of the Taiwan Strait speech last month, during which he declared his support for a referendum on the question of Taiwan's independence from the China.

That was on a Saturday. The following Monday the Taipei market dropped almost 6 percent, and it lost marginally more in subsequent sessions.

True, trading has recovered somewhat from that low point, but the market is still lolling listlessly around below the 5,000 mark. The exchange closed Friday at 4,764.94, a drop of 36 points and down 27 percent from its high on April 22.

Grim prospects for the chip industry are one thing, grim prospects for cross-strait relations another. Chen has pedaled back from his forceful remarks, but sources in Taipei suggest that the timetable for improved ties may have been pushed back by years. There are already signs that economic and diplomatic competition between Taiwan and China is likely to increase dramatically.

Chen's remarks on independence followed a long period of friendly gestures toward Beijing on his part. At the moment he spoke, prospects for direct air links and trade, both of which businesses in Taiwan are eager to see, had never seemed better.

The time had come for a step forward, it seemed. Taiwan's exports to China jumped 42 percent in June from the same month a year earlier, to US$2.84 billion. That followed a 45 percent increase in May. For the first six months, the increase was 29 percent. Analysts estimate that up to a third of these exports don't make the required stop in a third country (or Hong Kong) before arriving in China.

As to air links, Dragon Airlines Ltd (港龍航空), a joint venture between Cathay Pacific Airways Ltd (國泰航空) and the Chinese, has just put a fig-leaf arrangement in place. As of July, you can now board a Dragonair flight in Taipei, fly to Hong Kong, where the flight number is changed, and continue to Shanghai. A pain in the neck, but it gets you there.

No one expected direct links overnight, but they have undoubtedly sustained a blow.

"My guess is that it'll now be a couple of years before we see any progress," a Taipei analyst said. "And Chen is almost certain to run again, and win, when his term expires not much more than a year from now."

My take on Chen is positive, as regular readers will know. He gives an authentic voice to a citizenry that deserves one, and he has proven capable of navigating well in those tricky waters separating him from China. He has his work cut out for himself now, though, and not just across the Taiwan Strait but throughout the region.

Witness the little kerfuffle in Tokyo last week. A senior foreign ministry official proposed going to Taipei to mark the 30th anniversary of the end of formal relations between the two capitals -- a modest gesture of friendship. He was refused permission for fear of upsetting Beijing, and then resigned his post. Score one for Beijing, I suppose.

There is also the not-so-little kerfuffle over the "unofficial" visit of Vice President Annette Lu (呂秀蓮) to Indonesia a couple of weeks earlier. In the context of China's unending effort to isolate Taiwan, this was a big step for both Taipei and Jakarta. Xinhua, the official Chinese news agency, wants us to think the Lu visit was "an absolute farce," but I assign it a higher status than that.

This might prove to be a score for Taiwan, in fact. Lu's brief ride down to Indonesia followed by a matter of days the decision by CNOOC Ltd (中國海洋石油), China's offshore oil company, to purchase US$13 billion worth of liquefied natural gas from an Australian consortium, with a promise to buy also from the Tangguh offshore fields in eastern Indonesia.

Lu signed no deals and none will come in the immediate future, but one was almost certainly discussed. When it comes to energy supplies, at least, it now looks as though Taiwan and China may manage to compete amicably. Only a few months ago, CNOOC and Taiwan's Chinese Petroleum Corp (中油) signed a joint exploration deal in the Taiwan Strait. As my Bloomberg colleague Adam Majendie puts it, "Politics is important; oil is vital." Southeast Asia is another China card in Taiwan's deck, and it has its appeal in the region. Taiwan has considerably more fixed investment in Indonesia -- US$17 billion at present -- than China does, and it is already a large buyer of Indonesian liquefied natural gas. Worried about the rise of China? Come to us: That seems to be the message.

How heated might this kind of rivalry get? Hard to say now, though I can't see it becoming in any way dangerous. This kind of competition might help provide just the context China and Taiwan need to begin moving back toward talks on direct contacts.

Business is so often politics in Asia, and politics business: Ask any trader in the Taipei market.

Patrick Smith is a former correspondent in Asia. The opinions expressed are his own.
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