Before the bubble bursts

l  Taiwan's Executive Yuan (EY), or the Cabinet, approved a draft bill in early March that would introduce a selective sales tax targeting expensive purchases and speculative sales of real estate.

l  Though the draft law still needs to be approved by the Legislative Yuan (LY), this was a critical step that the Kuomintang (KMT) administration hopes will: (1) help cool the overheated property market, (2) narrow the widening wealth gap, and (3) make affordable housing more than just a campaign slogan but a reality, especially for those 40 and under.

l  Although administration officials believed the proposed “luxury tax” was consistent with the ability-to-pay principle and would not affect people who engage in ordinary transactions, there has already been a huge impact on the automobile and real estate markets throughout the island.

l  Most expect that during deliberations in the LY, there could be some amendments made to “water down” the bill’s intended impact. However, with over 60% of the respondents in recent surveys that expressed support for the new tax, the bill is almost certain to pass the LY and become effective on July 1.

l  Undoubtedly the “luxury tax” is a significant step for the KMT administration in addressing wealth inequality in Taiwan. Besides, with escalating housing prices often being the leading public complaint, the bill was drafted to curb further property speculation and return Taiwan's housing prices to more reasonable levels.

l  Since the news of such a tax was first released in early March, there has already been a visible impact on the real estate market, particularly in New Taipei and Taichung Cities. Many expect the wave of “sell-off” to reach its peak by mid-May, which would allow plenty of time to complete the property transaction before the “luxury tax” kicks in on July 1.

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DPP's victory in the March 5 legislative by-elections

* The opposition Democratic Progressive Party (DPP) handily won the legislative by-elections on March 5 in Tainan and Kaohsiung Cities.

Candidate	Vote Total	Vote Share
Hsu Tain-tsair (DPP)	49,002	61.25%
Chen Shu-hui, (KMT)	30,504	38.1%

Chart I. Result of the legislative by-election in Tainan City, March 5, 2011

Candidate	Vote Total	Vote Share
Lin Tai-hua (DPP)	53,833	69.7%
Hsu Ching-huang (KMT)	23,409	30.3%

Chart II. Result of the legislative by-election in Kaohsiung City, March 5, 2011

  
* Ahead of the next legislative and presidential elections, the result of the March 5 by-elections was an important indication of: (1) party momentum, (2) unity among the rank-and-file, and (3) the ability to mobilize supporters.

* Besides receiving another boost to the party's morale and momentum, the DPP also saw its vote totals increase in the two by-elections compared with its vote shares in the previous legislative elections held in January 2008.

* On the other hand, although there is no magic formula to cure its woes in the south, the ruling Kuomintang (KMT) will be scrambling in the coming months to “stop the bleeding” and somehow revive “grassroots fervor” that propelled the KMT to its landslide victory in the 2008 presidential race.

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More the merrier?

l  Taiwan's Ministry of Economic Affairs (MOEA) announced last week the second wave of 42 business sectors to be made available to mainland capital that included those—LED, semiconductor, and LCD flat-panel display—once considered sensitive.

l  The so-called second “positive list” brings to 247 the total number of industries that are open to Chinese investment since the first round of liberalization was announced on June 30, 2009. The new list, which became effective on March 7, includes 25 sectors in manufacturing, eleven in public infrastructure, and six in services.

l  While some referred to the first “positive list” as a market barometer, the second round appears more likely to attract substantial Chinese investment because: (1) there are more high-tech sectors that are more appealing to prospective mainland investors, and (2) there is now an institutional framework in support of cross-Strait trade and investment following the implementation of the “Economic Cooperation Framework Agreement” (ECFA) early this year.

l  According government regulations, Chinese investors will now be allowed to hold a maximum 10-percent share in Taiwanese companies in five sensitive manufacturing sectors including semiconductor production, semiconductor packaging, assembly and test, LCD flat-panel display, metal cutting machine tool making, and the semiconductor and electronics production equipment sectors.

l  However, Chinese businesses are not allowed to hold more than 50 percent of shares in joint ventures between Chinese and Taiwanese investors in these sectors, and they are prohibited to have management control in the newly-formed companies. Chinese investors are also required to provide business plans including cooperation structure and operational strategy to the MOEA for approval.

l  Chinese investment will be granted full access to the 10 sectors that are categorized as the least sensitive by the MOEA, including dyes and paints, cleaning products, metal molds, metal structures, metal architectural components, metal thermal processing, metal surface processing, wind power generators, battery sectors, as well as the repair and installation of industrial machinery industry. In services, mainland investors will enjoy full access in tourism cable cars, parking lots, and business and industrial parks, excluding forest recreational areas.

l  There continues to be apprehension within Taiwan in opening some of the more sensitive business sectors to mainland investment. While the ratio of Chinese investment will be restricted, mainland investors will be able to appoint directors to the board. If a Chinese national with both knowledge and experience in the business is appointed director in a China-Taiwan joint venture, there could be real concerns over possible leaks of sensitive technologies and market intelligence.

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Beyond talks of party unity

l  For the 2012 presidential contest, the biggest challenge to both the KMT and the DPP remains party unity. While the DPP has to contain and manage the rivalry between Tsai Ing-wen and Su Tseng-chang, President Ma Ying-jeou has to make sure that, among other things, his choice of running mate does not upset the balance of power within the KMT, particularly among those eying for a shot at the 2016 presidential race.

l  As such, there are more calls within the KMT in support of Vice President Vincent Siew running with Ma again in 2012, if his health permits. So far, both Ma and Siew have been mum on the subject, which will not be made public until May.

l  Since Siew will likely retire and leave politics with Ma in 2016 if elected to a second term, a Ma-Siew ticket for the KMT can: (1) maintain intraparty unity and balance, (2) ease concerns over Ma becoming “lame-duck” too early, and (3) prevent a premature and fierce competition among those jockeying for a shot at the 2016 party nomination for president.

l  At the same time, both the KMT and the DPP continue to pay close attention on the possible convergence of the so-called “third force,” led by former President Lee Teng-hui and former DPP Chairman Shih Min-teh. Though the room for a possible “third force” remains limited, neither the KMT nor the DPP would want to see its support base eroded by those "feeling neglected."

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Christmas comes early?

l  President of China's "Association for Relations Across the Taiwan Strait" (ARATS), Chen Yunlin, recently led a delegation of over 50 top business executives from more than 30 Chinese state-run enterprises to Taiwan for a six-day visit.

l  The primary purpose of Chen’s visit this time was to examine and explore investment opportunities in Taiwan, particularly those in southern cities and counties governed by the opposition DPP.

l  Besides identifying opportunities for cooperation in agricultural and emerging industries in southern Taiwan, the delegation also established channels for exports of agricultural, livestock and fishery products from southern Taiwan to China. This was a significant breakthrough for Beijing since it has long sought closer ties—economic or otherwise—with southern Taiwan, which has traditionally been the DPP's stronghold.

l  Since Chinese capital was allowed to invest in Taiwan in June 2009, the aggregate investments on the island have amounted to roughly US$153 million across 73 cases, far lower than the original expectations and the corresponding figures recorded by Taiwanese investors in China since 1990s.

l  Since most of the participating enterprises on Chen’s delegation were large state-run businesses, their investment decisions can, therefore, be more easily influenced by non-economic considerations. In other words, these prospective investments can, in turn, be dictated by changing political circumstances if cross-Strait relations move in a different direction in the future.

l Although Chen repeatedly stated that purpose of his delegation's visit to Taiwan was to “develop business opportunities for both Chinese and Taiwanese businesses,” the deliberate outreach to the DPP by visiting opposition-controlled cities and counties like Chiayi, Yunlin, and Kaohsiung made Chen’s trip nevertheless political in nature, at least partially.

l  Despite the mixed reactions that greeted Chen in southern Taiwan, it will, however, not be the last time that leading Chinese officials visit this area generally considered the hotbed of pro-Taiwan independence forces on the island.

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