Japan’s industrial output rose for the first time in six months and at twice the pace predicted by economists, but it’s the first investment deal in Taiwan by China that has started capturing attention across Asia.

The 1.6% rise in Japanese output was good news, as was the forecast of more to come in April and May, but it was the half-a-billion telecoms deal in Taiwan that stunned markets this morning.

State-controlled China Mobile agreed to buy 12% of Far EasTone Telecommunications Co, the first investment in Taiwan by a Chinese company since the Civil War ended in 1949.

The news, announced late Wednesday, came after trading on the Taiwanese stock market had closed. This morning it opened at the highest level in six months and kept rising.

While many Taiwanese companies have investments in China and are probably the single largest group of investors, investment the other way has been held up because of political tensions.

The NT$17.8 billion ($US529 million) purchase, announced by China Mobile yesterday, will shake markets throughout the region and even wider.

It shows that China and Taiwan are no longer at each other’s throats and that both countries, especially China’s current Government, believes it can do more to win back Taiwan commercially and economically by improving ties. It lessens strategic tensions with the US which has supported Taiwan’s independence for the past 60 years.

Beijing said this week it would end a ban on investments in the island on May 1 following an agreement to open cross-border operations for financial-services companies, expand direct flights and cooperate in crime fighting.

But the move by China Mobile is not a financial transaction: it is in a sector where China has been a major player domestically, and increasingly internationally, through its various state-owned companies.

It indicates that China wants to send a message that it is open to doing deals, even with countries that it has had difficulties with in the past.

So long as the deals have commercial and strategic sense from China’s point of view, they could be done. It’s why China is attaching so much importance to the Chinalco purchase of a major stake in struggling Rio Tinto for $US19.5 billion.

The message from the China Mobile deal is: “there are other deals to be done if you reject Chinalco”.

The statement from China Mobile mentions the strategic nature of the deal repeatedly:

The strategic alliance will facilitate the expansion of the Company’s business in Mainland, Hong Kong and Taiwan and help the Company provide more comprehensive services to its customers, which is vitally important for the Company’s future development as cross-strait communication grows.

Specifically, through the alliance, the Company believes that it will further expand its range of services by providing enhanced, better customised options to individuals who travel across the strait as well as business enterprises operating in both Mainland and Taiwan.

Furthermore, the Company considers that the cooperation will enable the Company to better explore future technological trends in the mobile communications market and accumulate advanced technological and operational expertise in areas such as 3G and next generation technology, since Taiwan is in a more advanced stage of development in both 3G-technology application and value-added data services and both parties are interested in exploring opportunity for cooperation in research and development of communication standards.

Clearly China sees a way of transferring ideas, technology and know-how from Taiwan from this deal.

Bloomberg quoted a Taipei broker, C.Y. Huang from Polaris Securities, as saying: “This is a landmark deal. China Mobile will lead the way for other Chinese companies that have been waiting to invest in Taiwan but were hesitating. This will open the floodgates for more Chinese investments into Taiwan.”

Being a stockbroker, that’s a natural reaction. He sees deal flow and money to be made, but the underlying logic can’t be denied.

Relations between China and Taiwan have improved since the Kuomintang Party won the Taiwanese presidency 12 months ago and jettisoned the pro-independence stance of his predecessor.

While China claims Taiwan as part of its territory, the two have been administered separately since the Nationalists (now the Kuomintang Party) left the mainland in 1949 after losing to Mao’s Communists in the Civil War.

China has already accommodated itself to special administrative zones for Hong Kong and Macau.

Peter Fray

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