The showdown on January 14, 2012

l  Taiwan's Central Election Commission (CEC) recently announced that the next presidential and parliamentary elections will be held jointly on January 14, 2012.

l  By combining the two elections, the CEC is moving the presidential election forward by more than two months. The presidential inauguration date of May 20, however, remains unchanged, and all 113 seats of the LY will be filled and sworn in on February 1.

l  Despite saving considerable administrative costs, the CEC’s decision this week may create controversies later if the opposition DPP wins the presidency and returns to power.

l  Under that scenario, the incumbent president would be “lame duck” for four months from mid-January to mid-May, with no apparent constitutional limitations on the powers that he may exercise.

l  In Taiwan’s highly partisan politics, it could lead to heightened domestic tensions if the president-elect, for instance, wants to restrict the policymaking authority of the outgoing president during the interim four months.

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The next China-Taiwan summit

l  Although Beijing and Taipei have agreed to hold another cross-Strait summit later this year, both sides have not yet decided when and where the next round of high-level talks will take place.

l  Relevant decisions will not be made until negotiators from both sides have reached agreement on the details of the planned investment protection agreement and the proposed nuclear safety accord.

l  While Taipei would like to have it in the first half of this year, prospects are not particularly bright since Beijing and Taipei remain at odds over, among other things, arbitration schemes to resolve trade and investment disputes.

l  On the other hand, there were positive developments in cross-Strait aviation last week since both sides agreed, in principle, to increase the number of weekly flights from the current 370 to 500. There will also be more cities added by both sides to service the increased flights.

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Taiwan's international space and domestic politics

l  Despite rapid progress in cross-Strait economic ties since May 2008, Taiwan’s international participation and visibility have remained restricted, primarily because of continued pressure from Beijing.

l  Most in Taiwan are not satisfied with the island’s limited, if not shrinking, international space. More importantly Beijing’s tactics to squeeze Taiwan internationally could undermine domestic support for government policy to continue engaging China economically.

l  Beijing’s position on the international space issue will stay largely unchanged, at least until the political transitions are over on both sides by mid-2013:

(1) Continue to insist on the “one-China” principle and the “1992 consensus” as a precondition to any discussion on politically-sensitive issues,

(2) Maintain a “case-by-case” approach in handling issues related to Taiwan’s international participation and space; and

(3) Retain the ultimate power on Taiwan’s international space, in case the ongoing cross-Strait rapprochement gets “derailed.”

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Making cross-Strait engagement irreversible

l  Despite Beijing's recent crackdowns on political dissidents, President Ma Ying-jeou made it clear recently that cross-Strait relations will continue to move forward.

l  It would seem politically unwise and against Taiwan’s interests to suspend or end exchanges with Beijing over issues that Taipei has little, if any, control over.

l  Since no major policy changes are expected irrespective of who wins the 2012 presidential contest, the challenge for both Beijing and Taipei is to find an acceptable compromise on key political issues like sovereignty and Taiwan’s international space.

l  This should also signal to Beijing that "economic concessions" will no longer be enough. There needs to be more goodwill in the non-economic domains, starting with a possible missile pullback.

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When "easy things" are no longer easy in cross-Strait negotiations

l  Top financial regulators from both China and Taiwan met in Taipei in late April to explore ways to enhance cross-Strait financial cooperation.

l  It was the first high-level discussion since the two sides formally inked a MOU in November 2009 on cross-Strait financial cooperation in banking, securities, futures, and insurance services.

l  However, economic negotiators walked away empty-handed from the one-day meeting since both sides could not agree on the principle of reciprocity in market access.

l  Taiwan’s banking community has long believed that their belated entry into China’s domestic market had placed them at a disadvantage with other foreign banks. An earlier permission for Taiwan banks to provide Renminbi (RMB) transactions will, therefore, enable them to become more competitive.

l  Moreover, some local banks had hoped that both sides could reach an agreement on allowing financial institutions from China and Taiwan to take a greater financial stake—up from the current 20% to at least 40%—in the other. In the end, both sides also came away without an agreement since differences in market size made it impossible.

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It's official: Ma vs. Tsai in Taiwan's 2012 presidential election

l  The stage is set as President Ma Ying-jeou and DPP Chairwoman Tsai Ing-wen received nominations from their respective political party last week.

l  We believe that: (1) the race will be tight, and barring something unforeseen, the final margin should be less than five percentage points, (2) though ideology will invariably play a part, major campaign issues will be on the economy, the widening wealth gap and “quality of life” issues, and (3) the voter turnout should go above 75%.

l  With job-approval ratings hovering around 30%, Ma will have to respond to questions related to competence. Tsai, on the other hand, has to ease anxiety over her judgment and the DPP’s ability to govern.

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l  Both will move to the center on policies ranging from cross-Strait relations to alternative energy. The 1.2 million first-time voters could well determine the election outcome.

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Raising the financial stakes

l    Since the signing of the “Economic Cooperation Framework Agreement (ECFA)” with China, Taiwanese banks have been allowed to invest in or acquire shares in Chinese banks in order to expand their presence in the mainland market.

l  Currently, Taiwanese banks' investment share in Chinese banks is restricted to 20 percent and each Taiwanese bank is only allowed to invest in two Chinese banks at most. As such, there’s been increasing calls within Taiwan’s financial community to raise the shareholding cap to 40 percent.

l  Among the Taiwanese banks that have established a foothold on the mainland, Fubon Financial (TaiEx 2881) has been one of the more aggressive players. As the second largest financial holding firm in Taiwan, its business covers banking, securities, asset management, and the sports lottery.

l  Fubon currently holds 19.99 percent of shares in China's Xiamen Bank, which performed exceptionally well and posted 20 percent growth last year, despite Chinese government efforts to curb asset growth in the banking industry.

l  Along with Fubon, many Taiwanese financial institutions are waiting to see how Beijing responds to these requests and if Taiwanese banks, insurance companies and brokerage houses can be granted “quasi-citizen” status soon for their operations on the mainland.

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