Taiwan Markets Buoyed by Chinese Tourists, Improved Trade Ties

By Bob Chen and Weiyi Lim

April 27 (Bloomberg) -- Wu Wenjun, a 45-year-old real estate agent from China, helps explain why Taiwan’s benchmark stock index rallied in the past two months and its currency gained more than 4 percent.

Wu said he spent more than 20,000 yuan ($2,928) on clothes in the first day of his visit last week, more than twice the average monthly salary of the island’s residents. Chinese tourists more than doubled in March, boosting consumption at the same time Taiwan’s government predicts the economy will shrink this year. Ties are set to grow stronger after the two governments yesterday agreed to allow cross-border expansion by financial institutions and increased direct flights.

“Of course China can help,” Wu said as he roamed a Taipei mall wearing a tour badge, sunglasses and a Hawaiian shirt. “We have more than one billion people. Just allow one million into Taiwan and imagine the money flowing in.”

The Taiex stock index rallied 29 percent since February to 5,880.77 last week, trimming its loss for the past year to 35 percent. Taiwan’s dollar strengthened to NT$33.711 against the U.S. currency from a seven-year low of NT$35.297 on March 3.

China and Taiwan will set up a supervisory mechanism enabling their financial services companies to operate in each other’s markets, according to a pact signed yesterday following talks in the eastern Chinese city of Nanjing. They also agreed to more than double weekly direct flights to 270 from 108.

Bad Data

Ties with China are strengthening as the island’s $355 billion economy slows. Export orders, an indication of shipments in the next three months, dropped for the sixth time in March, declining 24 percent from a year ago. Industrial output fell 26 percent, government data show.

Taiwan’s economy may contract 2.97 percent this year, the government forecast in April, reversing its November estimate of 2.12 percent growth. Analysts expect the currency will weaken to NT$34.50 this year, before climbing to NT$33.35 by the end of 2010, according to the median estimates in a Bloomberg survey.

“People are focused on all the bad data at the moment,” said Tai Hui, a regional head of research in Singapore at Standard Chartered Plc, a London-based bank focused on emerging markets. “The Taiwan dollar will benefit later this year when they start to realize the upside from closer integration with China.”

He predicts the currency will rally to NT$32.90 by the end of next year.

Leveraged to China

Relations have improved since Taiwan President Ma Ying-jeou won elections in March last year, abandoning his predecessor’s pro-independence stance. The island has enjoyed self-rule since Chiang Kai-shek’s Nationalists fled the mainland in 1949 after losing to Mao Zedong’s Communists in a civil war.

Chinese Premier Wen Jiabao called for an economic accord with Taiwan in March and said he’s so eager to visit that he would “crawl” there.

“Integration with the mainland economy will optimize Taiwan’s leverage toward China’s potential growth recovery,” Enoch Fung, a Hong Kong-based economist at Goldman Sachs Group Inc., wrote in an April 21 note. New York-based Goldman raised its 2009 economic growth forecast for China last week to 8.3 percent from 6 percent. Taiwan’s economy may grow 2.5 percent next year after shrinking 7.5 percent in 2009, the bank said.

Crazy About Taiwan

Taiwan’s tourism bureau estimates 87,000 Chinese visited from the mainland in March compared with 42,000 in February. So many plan to visit on the May 1 Labor Day holiday that the governments increased the daily quota to 7,200 from 3,000 this week.

“People are crazy about the Taiwan tour,” said Yang Guangming, a guide at Shanghai Railway International Travel Co., which charges 3,600 yuan ($527 million) for a five-day train and boat trip to Taipei.

Taoyuan-based EVA Airways Corp., Taiwan’s second-largest carrier, said almost 95 percent of the seats on its direct flights to China were filled in March. Wu, a property agent from the southwestern city of Chengdu, said the strength of the Chinese currency helped his shopping spree last week. The yuan buys NT$4.93 compared with NT$3.77 four years ago.

“Just look at how many people want to visit Taiwan,” said Hao Kang, who is head of overseas investments in Beijing with ICBC Credit Suisse Asset Management Co. and helps manage a $200 million fund for Chinese investors. “Right now we still cannot directly invest in Taiwan’s stock market but once it becomes possible, we certainly will.”

Consumer Demand

Foreign investors bought $1.5 billion more Taiwan stocks than they sold so far in April, heading for the biggest monthly net purchases since February 2008, according to Bloomberg data. Baring Asset Management (Asia) Ltd. started buying technology stocks after their earnings surprised investors.

China halved retail taxes on small cars and is providing subsidies for rural dwellers to buy electronic goods. Shares in AU Optronics Corp., Taiwan’s biggest maker of liquid-crystal displays, climbed 42 percent this year as Chief Executive Officer Chen Lai-Juh predicted China demand would boost sales.

“The Chinese government is committed to a growth rate of 8 percent or better and that source of demand is a surprise for the market,” said Khiem Do, a Hong Kong-based strategist for Baring Asia, which overseas $6 billion and is a unit of Springfield, Massachusetts-based MassMutual Financial Group.

To contact the reporters on this story: Bob Chen in Hong Kong at bchen45@bloomberg.net; Weiyi Lim in Taipei at Wlim26@bloomberg.net