China pays Taiwan geopolitical dividend

The financial crisis is paying out an unexpected geopolitical dividend. After decades of tension, mainland China and Taiwan last week announced a raft of co-operation strategies including a plan to let Chinese investors park money across the strait. The democratically governed island’s separatist lobby won’t like it – but Taiwan’s markets will benefit from Chinese capital, and less political risk.

Taiwan has been savaged by a vicious fall in exports. Its outbound trade fell 31% in April, Merrill Lynch estimates, leaving its economy on course for a 7% contraction in 2009. Unemployment is close to 6%, and bad debts from the manufacturing sector line bank balance sheets.

Healing the rift with China isn’t a quick fix, but should offer some new sources of wealth in future. Finance is one. Chinese institutions are rich with customers’ savings, yet for now can't invest a penny across the strait. Taipei’s new plan to let approved Chinese investors buy listed stocks and futures drove the stock market up 14% over two days. Tourism is another gain. Visa restrictions and a lack of transport options keep it down to just 1.5% of Taiwan’s GDP, compared to nearly 7% in Hong Kong.

Taiwan gets a mere 300,000 visitors from the mainland, against Hong Kong’s 17m - a gap that should shrink with proposals for more flights and cruise ships.

The financial crisis isn’t the only incentive for Taiwan to talk. The US, which has traditionally kept the peace in the Taiwan Strait, doesn’t want to risk irritating China, its largest creditor. And mooted free-trade agreements between China, South Korea and Japan give a clear message – if Taiwan won’t cosy up, others will.

Meanwhile, finance might buy Beijing something that threats of force could not. Taiwan’s closer ties will only make it more dependent on the political whims of the People’s Republic. More mainland tourism means a bigger hit to consumption if China threatens to turn off the tap; more investment means more assets that can be seized if relations turn frosty.

That might be a cause for concern later. But for now, while Taiwan’s options are few, and China’s cash plentiful, expect these neighbours to get ever closer.