Taiwan-China air ties to strengthen

Taiwan's president has pushed for closer ties with the mainland, but China has rebuffed the move so far

By CNN's Alex Frew McMillan

HONG KONG, China (CNN) -- China Airlines will agree to buy a 25 percent stake in China Eastern's cargo operations next month, China Eastern has said.

The move could be the most significant development in aviation across the Taiwan Strait in more than 50 years, analysts say.

"We're seeing the watershed, really, in Taiwan-China relations," said Derek Sadubin, manager of information services Centre for Asia-Pacific Aviation.

Taiwanese carriers have been prevented from flying direct to mainland China, and vice versa, since the island broke diplomatic ties with Beijing in 1949.

Thorny politics

Taipei-based China Airlines has been in protracted talks to buy a quarter of Shanghai-based China Eastern's cargo operation, which is called China Cargo Airlines.

China Eastern's chairman, Ye Yigan, said he expects the companies to sign an agreement on the sale in September. Ye made his remark as the Shanghai company released interim earnings on Wednesday.

Though both companies are keen to complete the deal, the sale is thorny, politically. Both the Chinese and Taiwanese governments still have to sign off on it.

China Airlines likely does not want to front-run the Taiwanese government in saying the sale will go ahead. Taiwan has yet to give it the thumbs up.

A similar deal signed in 1999 fell apart when the island's relations with the mainland took a turn for the worse.

"It [the sale] is still going ahead, but all the details and the approvals are not obtained yet," China Airlines spokesman Paul Wang said. "We are expecting to have some good results before the end of this year."

He noted that the company's CEO, Christine Tsung, is traveling until September 10 and would have to finalize any deal.

Freight first, passengers later

China Airlines would buy the 25 percent stake from China Ocean Shipping, the parent of Hong Kong-listed sea transportation company Cosco Pacific. The price is not yet set.

The deal would mark the first time a Taiwanese airline has bought into a Chinese airline. It would also likely mean the start of indirect freight links, then direct freight flights.

"It's a major event," Sadubin said. China Airlines "is positioning for this expected massive growth in China's freight exports."

Sadubin noted that freight acts as the frontrunner in "open skies" policies. But passenger service, which is complicated by visa restrictions and is more politically charged, likely wouldn't be far behind, he added.

Taiwan keen to free up

China holds the prospect for huge growth, as Asia's fastest-growing economy heads toward joining the World Trade Organization. The head of the WTO says that might come as early as November.

The win-win for Chinese carriers is that Taiwan's airlines have the management experience, freight infrastructure and links with trade partners in the United States and Europe.

The Chinese government, which hopes to see China Eastern build into one of three major carriers there, typically looks to overseas partners to lend capital and expertise to build out its air infrastructure.

Though many Taiwanese businesses have opened operations nearby in Fujian province, Taiwanese executives still have to fly indirectly to China, typically via Hong Kong.

So, too, does freight. That restricts China Airlines freight dealings with the mainland to a few electronics shipments.

But its links with the mainland are growing. China Airlines and its affiliates already own 18 percent of a new freight operation at Xiamen cargo airport, across from Taiwan on the coast of the mainland's Fujian province.

Taiwan's recent economic slump - which has seen it fall into recession -- has forced it to look at freeing up trade with the mainland.

President Chen Shui-bian opted Sunday to pursue closer trade ties with China. But the island's overtures to open up direct trade have so far been rebuffed by Beijing.

Using official news sources, China said direct trade with Taiwan "remains a big question," given Taiwan's refusal to accept Beijing's one-China policy.

China regards Taiwan as a renegade province. It wants Taiwan to hew to the "One China, Two Systems" policy it maintains in Hong Kong.

Taiwan has fiercely defended its independence.