Taiwan frees up business ties with China

In this story: Taiwanese companies already there Closer links inevitable after WTO Bank change more significant RELATED STORIES

By CNN's Alex Frew McMillan in Hong Kong

TAIPEI, Taiwan (CNN) -- Taiwan this week took two steps to free up business ties with China.

But they will have limited impact, experts say, and mainly reflect what is already happening.

Taiwan's cabinet on Wednesday gave the go-ahead for its banks to open offices in the mainland. It also let them deal directly with customers and other banks in China.

That follows Monday's move, when Taiwan's Finance Ministry relaxed investment rules with China.

Taiwanese public companies can now invest up to 50 percent of the profits they make overseas in the mainland, up from 20 percent.

But business leaders complain that Taiwan needs to go further, if its companies are to stay competitive. They are keen to take advantage of cheaper labor in China and to firm up ties with Asia's fastest-growing economy.

Taiwanese companies already there

These latest steps are more show than tell, observers say.

"This is the right step, because companies are already doing that," said Cheng-mount Cheng, economist with the Taiwan Institute of Research. But he said the announcement is mainly "propaganda."

"It is not really of any importance, but it says the government will loosen up the policy a little bit," he said.

Relaxing investment rules only reflects what is on the ground. Taiwanese companies already invest heavily in China via shell companies in tax havens such as Bermuda, the British Virgin Islands and the Cayman Islands.

Estimates suggest that Taiwanese companies invested between $20 billion and $30 billion in the mainland last year. But the pace is picking up rapidly.

As much as $10 billion has moved from Taiwan into China this year, according to Andy Xie, China economist with Morgan Stanley.

Taiwan's government, under president Chen Shui-bian, has been keen to keep as much of that capital at home as it can. It fears a "hollowing out" of Taiwan's economy as more and more industry moves to China.

"The policy is still very defensive," Xie said. "The government doesn't know what's going to replace the economic activity that is being moved to China."

Taiwan is in a tough spot. Its economy posted its worst showing in 26 years last quarter, with first-quarter growth coming in at 1.1 percent.

Closer links inevitable after WTO

That stemmed partly from the slowdown in technology spending. But though Taiwan is famed for its chip making, half of its business is old economy.

Those companies need to take advantage of cheaper costs in China or lose out altogether. Taiwan's banks and companies also want to firm up links before China joins the World Trade Organization, expected next year.

Taiwan's accession will likely immediately follow. The easing of trade and investment policies involved will likely see many Taiwanese companies leave.

Political tensions remain high with China, which regards Taiwan as a renegade province. Although that keeps Taiwan from completely freeing up trade, experts say a defensive attitude won't work.

"In the end, this sort of protectionism doesn't help you," Xie said. "You never stop this sort of thing."

Bank change more significant

The freeing up of banking rules will have a more dramatic impact. Taiwan's more than 50 local banks face fierce competition in a crowded home market.

In the long run, they need to be able to work with home-grown companies looking to expand. They have lost out because it was impossible for them to help customers expand in the mainland.

The banks have also taken a hit when Taiwanese companies, typically in manufacturing such as textiles, have moved to China leaving bad debts behind. With mainland branches, they would be able to track those debts down.

It will take some time for banks to make the leap across the strait of Taiwan, though. Many of Taiwan's banks are new and small.

The finance ministry placed asset, profit and capital requirements on expanding in China. That means only Taiwan's 10-largest banks qualify to invest in China now, Cheng said. Nine of the 10 are publicly run, and likely to hew to the government's line.

Still, financial institutions are very interested in getting access to China, and for more products. Only around 20 percent of China's population has insurance.

"Most of the banks in Taiwan are very interested in the Chinese markets. But because of the policies now they can only wait," he said.

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