China / Taiwan

It is a textbook case of cheque-book diplomacy. China Mobile’s intention to buy 12 per cent of Far EasTone Telecommunications, announced late on Wednesday, drove the Taipei market wild on Thursday.

Excitement is understandable. This is the first investment by a Chinese state-owned company in Taiwan since a civil war ended six decades ago. President Ma Ying-jeou has made various political overtures since taking office last May; any economic rapprochement with China, which accounts for more than half of Taiwan’s exports in spite of everything, is a big deal. But the leap in the Taiex, up a maximum 7 per cent – to a trailing price/earnings ratio of 36, more than double the five-year average – is irrational.

For a company the size of China Mobile, a $533m investment – less than 2 per cent of its year-end cash on hand – is tokenistic. In spite of warm words about working with Far EasTone on procurement and services development, its focus will remain squarely on emerging markets, rather than saturated Taiwan.

And there is little reason to suspect that this will unleash a wave of deals. At a time when China’s coastal regions are feeling neglected by the inward-looking stimulus package, it is unlikely that Beijing will prioritise investment further afield. Taiwan’s fundamentalsremain unattractive. Unemployment reached a record high of 6 per cent in February. The fiscal position becomes less comfortable by the day – among AA-rated sovereigns, only Belgium and Japan have higher net debt to output ratios.

For the medium term, Taiwan’s turnround will probably be driven by a return of its capital rather than an influx of anyone else’s. For the first time in 20 years, the island saw a net inflow of repatriated funds in the second half of last year. There is still about $240bn of Taiwanese money overseas – almost two thirds of last year’s gross domestic product. The less bellicose the cross-strait rhetoric, the greater the chances this comes home.

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