Storming The Mainland

Taiwan business wants to invest big in China-and may get a green light

The chairman of $10.7 billion Formosa Plastics Corp., Y.C. Wang, has big plans for China. As head of Taiwan's largest private company, he recently asked his government's investment board for approval to build a $3 billion power plant across the Taiwan Strait. That may be just for openers. Speculation is rife that the tough, secretive Wang also aims to build a huge petrochemical complex in China. "The power plant is just a kernel," says one financial analyst in Taipei.

Whatever his grand designs, Wang is stepping up pressure on Taipei to improve ties with China. With both sides cooling their angry rhetoric since March--when Beijing fired missiles near Taiwan and the U.S. Seventh Fleet sailed in--Wang and other Taiwanese executives are pressing the government to let them expand economic links with China. "The business community is not afraid of the government," says David Yu, vice-president of International Investment Trust Co., which runs a Taiwan mutual fund. "Businesspeople are strongly testing government policy."

OPEN DOOR. President Lee Teng-hui's government is already showing signs of accommodation. In recent weeks, Taipei has announced a series of economic measures aimed at improving cross-strait ties. On July 1, Taipei opened the door to more categories of imports from China via Hong Kong and other channels, which amounted to $3 billion last year, 13.7% of total two-way trade. The government also has eased travel restrictions on Chinese executives. Last month, it gave the O.K. to Taiwanese brokerages to set up research offices in China. And it is agreeing to let insurance companies invest there. Beijing has yet to cooperate, but it has cooled down the vitriol that had been commonplace before Lee's March election victory.

Another big step forward was the late June visit of Wang Guixiang, chairman of Beijing-based China National Aviation Corp. CNAC last spring gained effective control of Hong Kong Dragon Airlines Ltd., which will start flying to Taiwan next month. Wang, who is also chairman of Air Macau, visited Taipei to complete ticketing agreements with China Airlines Ltd. and Eva Airlines Corp., which will issue tickets to the mainland on Air Macau flights from Taiwan via the Portuguese enclave. That skirts the ban on direct air links. Other state-sector companies are talking, too: The government-owned oil companies of Taiwan and China recently inked a small but politically significant $1 million joint venture to look for offshore oil in the Pearl River basin.

Taiwanese business leaders are hearing reassuring words from their own government. From Lee on down, officials are speaking with one voice, arguing for reunification in the long term. Lee recently appointed Chang King-yu to be his chief adviser on mainland affairs, a move that should be well received in Beijing because Chang is regarded as favoring reunification.

Taipei says it has also "clarified" its campaign to get into the U.N., a move that would be anathema to Beijing. After offering the U.N. $1 billion to help win membership, officials now say they were just asking for a study group to look into ways Taiwan could speak out in international organizations. "This has nothing to do with an application for membership in the U.N.," says Koong-Lian Kao, vice-chairman of Taiwan's Mainland Affairs Council. Instead, many believe the government will focus on attempts to join economic organizations such as the World Bank and the International Monetary Fund.

The Formosa Plastics proposal is a key test of how far Lee's government is willing to go. In 1990, Lee talked Wang out of building a sprawling $7 billion petrochemical plant in China, persuading the tycoon to build it in Taiwan instead. Beijing would greet an approval this time as a meaningful step toward improving ties. But Taiwanese officials fret that a flood of other corporations would follow Wang to the mainland. "This is [still] negative from a political point of view," says Kao. A big outflow of investment could prompt Taiwan "to lose our bargaining power" with China, he adds.

Other companies are pressuring the government, as well. Asia Cement Corp., a subsidiary of Far Eastern Group, will apply in July to build a $240 million cement factory in China. The company hopes to add a second phase that could cost up to $200 million. Many companies are becoming more open about their investments in China. As of June, 76 companies filed applications to the government disclosing a total of $1.3 billion already indirectly invested in China, up from 41 companies in February. For the first four months of this year, when tensions reached a peak, investments grew 8.8%, with an average size of $2.7 million. Altogether, the Taiwanese have set up more than 30,000 small and midsize businesses on the mainland.

While the executives in Taiwan put pressure on Lee, channels of communication are opening wider on the mainland. Taiwanese businesses in China have been organizing to lobby the central, provincial, and municipal governments to protect their investments. The Beijing Association of Taiwan-Invested Enterprises, for example, wants China to put teeth in an investment-protection law passed two years ago. "Most Taiwanese are still waiting for the central government to make detailed provisions," says Charles M. Wu, the group's chairman.

For now, the bellwether on improved ties remains the Formosa Plastics deal. Formosa's stock has jumped 50% in the past month, buoyed by investors bullish about prospects on the mainland. Overall, the Taipei stock market is up 40% since February.

GOOD PLAYS. Opening up big-ticket investments across the Taiwan Strait could also beef up the island's financial markets as a whole. Investment bankers argue that while Taiwan will experience a short-term outflow of capital by big companies investing in China, international financial institutions will plow money into Taipei stocks perceived as good "China plays," preventing any capital crunch. If Taipei blocks the move, Taiwan companies could step up efforts to list in Hong Kong and Singapore to raise money for their growing China ventures. "That will prevent the rise of capital markets in Taiwan for investments in China," warns Peter Kurz, Taiwan branch manager of ING Baring Securities Ltd.

For now, at least, Taipei and Beijing have agreed to test the limits of how closely they can knit together their economic interests. There will still be points of friction, to be sure. The two are skirmishing over whether South Africa, the last major country to extend official diplomatic recognition to Taipei, will switch to the mainland. But that is a minor-league spat compared with the threat of war just months ago.

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