China Watch: Slowed China-Taiwan Trade Talks Have Investors on Hold

NEW YORK ( TheStreet) -- It was supposed to be a red-letter year for China's economic engagement with Taiwan.

The island's most China-friendly president in history had won re-election, and both sides followed this event by pledging to tear down more trade and investment barriers as a prelude to any political agreements between the two old enemies.

But red flags are beginning to fly instead. Although both sides wax optimistic about more agreements in the pipeline, momentum has at least slowed on deals that would cut import tariffs and allow more investment in Taiwan from the other side.

The slowdown could be just a pause as China grapples with its own leadership transition later this year, but it could portend something chillier, such as China demanding political concessions that Taiwan doesn't want to give.

For now, the small number of companies in China and Taiwan that have gained from earlier trade deals is waiting for the next move.

So are some major publicly traded companies in Europe and the U.S. that see profits from the trend of warmer China-Taiwan relations but need reassurances that trend will continue.

Negotiators from the two sides are supposed to meet in Taipei before the end of June. Yet no date has been set, and their skeletal agenda covers investor protection accords, but nothing that actually rips down barriers.

The barriers were built very high before 2008, when Taiwan was talking about de jure independence from China to consummate about six decades of self-rule. China claims sovereignty over Taiwan and had threatened to use force if Taiwan veered too far toward legal independence.

After 2008, with sabers dropped, Taiwan's incumbent president turned icy relations into a sudden flow of trade, transit and economic deals. His government has gradually let mainland Chinese firms buy shares on the Taiwan Stock Exchange and make direct investment in Taiwanese companies. The two sides also opened 558 direct flights and allowed millions of mainland tourists to visit the island just 100 miles away.

Those deals steadied Taiwan's China Airlines (2610.TW) and EVA Airways (2618.TW) as China flights suddenly went from zero to 10% of their business.

They also benefited major hotel operators such as a Taipei branch of the U.S.-based Holiday Inn ( IHG), which said it had earned money on the takeoff in tourism.

But Chinese firms can normally buy no more than 10% of a company listed on the bourse in Taipei. Taiwanese authorities still have the power to spike foreign-direct-investment bids case by case even if the rules give Chinese investors a conceptual all-clear.

The scant access to Taiwan's lucrative private equity and fast-appreciating real estate markets remains little changed since 2008.

If investment caps fall further, mainland Chinese are expected to buy shares of Taiwanese smartphone developer HTC Corp. (2498.TW) and flat-panel maker Chimei Innolux (3481.TW) because the share prices are cheap.

HTC has lost 66% over the past year and Chimei 64%, largely because of economic problems in their overseas markets.

As China is distracted with its leadership transition, the two sides have evidently not yet begun to talk about dropping import tariffs on up to 11,000 items. They got a promising start in 2008 by slashing tariffs on an initial 800 items, but obvious benefits are limited mainly to a few specialized petrochemical firms.

Finally, Taiwan believed that China had felt enough goodwill toward it since 2008 to not protest its pursuit of a landmark free-trade deal with Singapore. That country would become Taiwan's first major trading partner to ink a deal letting in exports, such as consumer electronics, at low tariffs.

Two years later there's no word on why the Singapore deal is taking so long or when it will be signed. Maybe Beijing is too busy to sign someone's dotted line -- or having second thoughts.

"We need more progress and more concrete items," says William Dong, head of Taipei equity and research with UBS, summing up the status of China-Taiwan tie-ups. "My view is it's going to have to wait a bit."

Among those waiting for progress is Volkswagen (VOW.F). The German carmaker has been scoping out Taiwan since 2010 as a would-be megafactory site, with one of its criteria being how liberal China-Taiwan trade rules become, the government and analysts say. VW's share prices have held around the same level over the past year.

Some have already put down their money, presuming things at least won't get worse. Starwood Hotels & Resorts Worldwide ( HOT) W Hotels has opened a glittery tower in Taipei since 2008, while its overseas hospitality rivals pursue hotels in mountainous scenic spots popular with tourists from China. Share prices of Starwood Hotels & Resorts Worldwide have held steady since this time in 2011.

U.S. high-tech giants such as Google ( GOOG) and Qualcomm ( QCOM) have also announced massive projects in Taiwan within the past two years.

Share prices of both have risen significantly over the same period. Their pro-Taiwan decisions rested in part on the island's economic stability, which depends on firm links with China. Before it started linking up with China, Taiwan had lagged newly industrialized peers such as South Korea and members of the Association of Southeast Asian Nations.

Japanese high-tech firms leery of the risks of doing business in China but keen to keep a channel open to the giant market are considering expansions or partial relocation to Taiwan as its ties with Beijing improve, one analyst in Taipei adds.

There are no guarantees, but the investor protection agreements on this month's negotiation agenda could be the key that opens doors to major new investments.

Those pacts would offer legal guarantees to investors from one side with interests on the other -- particularly important in the absence of diplomatic relations.

Separately, this month, a Taiwanese financial regulator said it had approved two Chinese banks, Bank of China (3988.HK) and Bank of Communications (3328.HK) to set up offices in Taipei. Though they can do only limited business for now, their permits show that the trend still seems to be toward more open relations.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
At the time of publication, the author had no positions in any of the stocks mentioned.