BizAnalyst Network: Taiwan Tied-Down?

Tuesday, November 15, 2005

Taiwan Tied-Down?

Taiwan Tied-Down?
Monday, November 14th, 2005
Baltimore, MD * Jackson, WY * Missoula, MT

In this Issue...

* Waking Dragon: Taiwan Tied-down?
* Do We Really Have to Choose?
* 4 of the Greatest Contrarian Plays of All Time

Quote of the Day

"Dream different dreams while on the same bed."

- Chinese Proverb

_____

Dear Wealth Daily Reader,

As China weaves an international web of trade alliances, the hardest
strand to sort out is also its most public foreign policy matter. Taiwan
has maintained since 1949 that it is a separate entity from the
mainland, which the Beijing government of course refutes. What effect
does this tension exert on trade between the two countries, and on each
government's relationship with the rest of the world?

China has successfully waged economic war on Taiwan, which it still
considers a renegade state. In doing so, they have attacked the small
island with a vast and powerful arsenal, though not militarily.

Taiwan is officially known as the Republic of China (ROC), in keeping
with the letter of Beijing's One-China policy (China is known as the
People's Republic of China, or PRC)

Taiwan's athletes in events from the Olympics all the way down to the
Little League World Series compete under the banner of Chinese Taipei,
another euphemism for the semi-independent state.

Fewer than 20 foreign countries operate embassies in Taipei, and
apparently mail to them is rejected if it is addressed to Taiwan. The
mere recognition of the name Taiwan is diplomatically undesirable, and
acknowledgement of Taiwan itself is more and more costly from an
economic standpoint, as Senegal demonstrated recently with its defection
to Beijing.

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_____

Wouldn't It Be Nice...

Taiwan got off to a rocky start in the western notion of democracy. The
1.5 million mainland Chinese who fled to Taiwan in the wake of the
Communist victory following World War II felt the need to remain on war
footing, as they foresaw a victorious overthrow of Mao's Chinese
communists.

Decades passed, and martial law remained in force in order to maintain
the Taiwanese population in the face of the looming PRC threat.

The Taiwan-China feud even became the centerpiece of United States
politics, featuring most prominently in the 1960 presidential election
of Nixon vs. Kennedy. The islands of Quemoy and Matsu, just off the
Chinese mainland, were being assaulted with missile barrages by Mao's
People's Army, and they continued until 1995.

Nixon campaigned heavily on the idea that Kennedy would let Communist
China take Quemoy and Matsu, though the third Taiwan-held island,
Wuchiu, was barely mentioned.

Especially since putting an end to martial law in 1987 and allowing
significant freedom to political parties, the press, and individual
Taiwanese, the island has played a significant role as the "other
China." Frankly, I think this is the China most Americans would prefer
to deal with. At least we could sleep better knowing that we support a
democracy in the face of autocratic socialism.

But alas, Communist China knows that it can draw more flies with cheap
labor costs and low work safety standards than Taiwan can with its
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_____

Do We Really Have to Choose?

Believe it or not, we often buy in to Taiwan by investing in China. In
1985, Taiwan began to loosen restrictions on Taiwanese companies wishing
to invest in mainland China, and since then the "renegade" has fueled
much of China's astounding economic restructuring and growth, coming in
second only to Hong Kong and Macau, which of course have been
reincorporated into China after a century of European ownership.

Taiwan encourages students from the mainland to come to Taiwan to study,
requiring them to learn the Traditional Chinese writing system (the PRC
uses a Simplified Chinese standard) and incorporating mainlanders into a
highly skilled technical workforce that produces 2/3 of the world's
notebook computers.

As sales of notebook and other personal computers begin to equalize with
the desktop market, expect Taiwan and China to engage in competition for
both expertise and manufacturing capability. There are already rumblings
that China is turning some Taiwanese industrial parks into ghost towns
as foreign investment is magnetically drawn to the mainland juggernaut,
but Taiwan will not give up easily.

As I have said before, the Asian economic sphere is powered by China,
but China is tied directly to Taiwan and the tide of one will affect the
other, though not irreversibly.

Inching Towards Each Other

In foreign policy terms, the current situation between China and Taiwan
is a perfect example of d�tente. The two are not officially ready to
bury the hatchet, and I do not see that move coming for quite some time.
However, if the Chinese are willing to let the Taiwanese go about their
business (quite literally) without formally declaring independence, we
may see a loose official agreement down the road.

The most probable situation is that China will use the example of Hong
Kong and Macau to show the Taiwanese that it is possible to have freedom
while being attached to the PRC.

However, Hong Kong has been teetering on the precipice between
British-sown legislative democracy and Chinese Party rule since its
annexation in 1997. Beijing has given itself until 2047 to institute
universal suffrage, which it will do at its leisure. It is doubtful
whether Taiwan would voluntarily put itself in the same situation.

However, there are more and more gestures of cautious optimism for a
cooperative future from both sides.

This month, Chen Yunlin, Director of the Taiwan Affairs Office of the
Chinese State Council, will be the highest-ranking Chinese Communist
Party official to ever visit Taiwan. His trip will be under the auspices
of an economic forum, and the KMT (Taiwan's oldest political party,
whose members fled China in 1949) will coordinate his arrival and
participation in the conference.

There is also news of increased air travel between Taiwan and the
mainland, and even rumblings of a tunnel underneath the Taiwan Strait,
which could connect the two rivals just as friendly England and France
are served by the Chunnel.

Despite or perhaps because of China's rock-solid stance that Taiwan is a
sort of amputated limb that needs to be reattached, China is not taking
the island by force. Rather, by banking on economic growth and
historical homogeneity among the two countries, China hopes to recreate
one undisputed whole from the uneasy parts.

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4 of the Greatest Contrarian Plays of All Time

1) Who: Saudi Prince Alwaleed bin Talal bin Abdulaziz Alsaud.
Play: Citi Bank.

In the late 1980s and early 1990s, Citibank was going under.

At $11.13 on Oct. 29, 1990, the stock was down more than 50% from its
highest closing price in the previous 52 weeks. Every investor thought
Citicorp was finished. A bank that had earned $1.9 billion in 1988, was
now posting a loss of $885 million for the 1991 third quarter.

Enter Saudi prince Alwaleed. At Citicorp's most dismal times, he
invested $590 million of his own money (in February 1991, at $11.00 a
share).

The economy rebounded, interest rates fell and earnings improved.

By October 1992, Citicorps stock was at $16.75, making the prince a
return of 52% already. A year later the price was at $36.25, returning
the prince 230% of what he invested.

By 1997, his return was 983.20%. It's good to be the, uh, prince!

Alwaleed says he has one basic rule when he's contemplating an
investment: "Anything that's worth $4 billion and costs $1 billion, buy
it."

When asked why he was willing to make such a big bet on a bank most
thought was finished, the prince gave an answer that should have any
contrarian nodding in agreement: "In the last 19 months I watched the
stock go from 35 to 10.75. It was very tempting, almost half its book
value. The franchise of Citicorp's internationally is unmatched by any
other bank in the world."

2) Who: Jesse Livermore.
Play: Shorting Stock Market both in 1907 and 1929.

Jesse Livermore predicted the stock market crash of 1907.

He sold short as many publicly traded companies as he could get his
hands on, and made $3 million in one single day. That's the equivalent
of $61 million today.

Twenty-two years later, he again predicted a market crash. In 1929, when
everyone else in the world lost almost all of their investment and the
United States was thrown into the depression, Jesse Livermore again sold
short and made $100 million.

Adjusted to today's dollars, Jesse Livermore made $3 billion in one day.

3) Who: George Soros
Play: British Pound

In one of the greatest contrarian plays of all time, George Soros went
short the British pound and earned $1 billion in one single day: Black
Wednesday.

In 1992, George Soros borrowed billions in British pounds and converted
them to German marks. The Bank of England was stubbornly refusing to
either raise its interest rates to levels comparable to those of other
European countries or to float its currency. At a certain point, the
Bank could not refuse anymore and was forced to devaluate the Pound
Sterling. George Soros then repaid what he borrowed at the new, much
lower value, and earned $1 billion.

He was dubbed "The man who broke the bank of England" for his play,
which actually forced the British banking system to enact major reforms.

4) Who: John Templeton
Play: Buying US stocks

At the end of the Great Depression, most American companies were either
bankrupt or non-existent. No one had either the money or the nerve to
invest. As a consequence US stocks were severely undervalued.

John Templeton realized this. He also knew that since Europe was on the
brink of war, the United States would somehow get pulled in: either into
the actual battle or simply by supplying European Allies with military
supplies, as it had done in World War One. He realized that this would
spur the American economy and lift it out of the Depression.

When everyone else was busy hoarding their cash under their mattresses,
John Templeton convinced his boss to loan him $10,000. He invested that
money in 104 US stocks all that were selling for less than $1 in 1940,
at the outbreak of the war. 34 of the companies he invested in were
bankrupt.

Then he sat back and waited. Sure enough, four years later his $10,000
was already worth $40,000. He registered a profit on all but four of his
stocks and in the end made five times his money.

Sincerely,

The WD Research Staff