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Will Taiwan Open to Chinese Investment, or Will Protests Derail the Deal?

TAIPEI (TheStreet) -- A blockade of Taiwan's parliament and clashes between protesters and police Monday threaten passage of a trade pact that would open the investment-hungry island to investments from the economic powerhouse of China.

Banks, tour operators and health care firms from the world's 26th largest economy must wait indefinitely -- likely until at least August -- for ratification of a China-Taiwan deal that would liberalize the service sector.

The deal was signed in June with ratification expected by the end of 2013, but postponed because of disputes in parliament. The fresh delay this month has already disappointed markets, with Taiwan's financial and insurance sub-index down 2% since Wednesday.

"In the short term, share prices are going to be affected," says Shih Hsiao-chi, economist at SinoPac Securities in Taipei. "If this situation at the legislature keeps going on goes on, share prices will be more heavily affected and foreign investors will start to waver."

The trade pact would open 80 service categories in China and 64 in Taiwan, allowing Taiwanese firms to expand into their biggest market, where two-way trade surpassed $100 billion for the first time in 2010.

Thousands of protesters, mostly students backed by Taiwan's main opposition party, say their government rushed into the deal with an old political rival without transparency or due process. The government wants a speedy approval to catch up with neighbors that already have trade deals with China.

Hundreds clashed with police as they tried to occupy cabinet offices in Taipei early Monday. Several hundred more have occupied the legislature since Wednesday and remained on Monday, scuttling plans to ratify the trade pact this month or next.

A delay of service trade agreement means some of Taiwan's biggest banks with toeholds in China, names such as Cathay Financial (CHYYY:OTC) and Mega International Commercial Bank (2806:Taiwan), must wait indefinitely for a chance to expand. 

Many analysts in Taipei consider shares on the Taiwan Stock Exchange to be undervalued.

Some Taiwanese companies do trade in ADRs, and ETFs such as iShares MSCI Taiwan Index (EWT) give U.S.-based investors another route to local equities.

China signed the service trade pact partly as a political favor as it sees self-ruled Taiwan as part of its territory and has threatened to take it by force if needed. But it prefers unification through peaceful means such as economic ties.

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