In a bid to boost the economy, the cabinet has decided to completely open up Taiwan to Chinese investment at various selected "trial locations."

The highly anticipated draft proposal for "Free Economic Demonstration Zones" will see the light of day in November, and the zones are expected to be launched formally next year. In elaborating on the demonstration zone concept, Yin Chi-ming, chairman of the Council for Economic Planning and Development (CEPD), notes that the zones will award WTO treatment to Chinese investors for a much larger range of industries and investment items than currently permitted.

The demonstration zones will be established adjacent to the Port of Kaohsiung, the Port of Keelung and the Taoyuan Aerotropolis, an urban planning development centered on Taoyuan International Airport. In these zones, Chinese investment will no longer be subject to the government's Regulations Governing Permission for People from the Mainland Area to Invest in Taiwan. Instead, Chinese investors will have the same rights as other foreign investors, which will allow them to become shareholders in Taiwanese companies in the high-tech and financial industries, participate in infrastructure projects and even act as contractors – all items that were previously off limits.

"This listless bureaucratic program has finally come around," declares the executive of a Taiwan-based foreign bank who frequently travels back and forth between Taiwan and China. The executive, who did not want to be named, observed that Chinese investors' initial interest in buying a stake in or acquiring Taiwanese companies decreased markedly after plans by state-owned China Mobile Ltd. to buy a 12-percent stake in Taiwan's mobile carrier FarEasTone Telecommunications Co. fell through in 2009, due to regulatory obstacles.

When most recently news spread that regulations would be massively relaxed in the demonstration zones, a number of world-class Chinese companies renewed their efforts to find suitable investment opportunities in Taiwan.

C.Y. Huang, chairman of the Taiwan Mergers and Acquisitions and Private Equity Council (MAPECT), observes that Chinese investors are zeroing in on four sectors – landmark infrastructure projects, the high-tech industry, commercial real estate, and logistics and transportation.

In the past the activities of Chinese investors were heavily restricted by government regulations. While Chinese investors were allowed to invest in infrastructure projects, they were banned from acting as contractors. They could invest in the conventional manufacturing sector, which lacks international competitiveness, but were banned from involvement in the companies' day-to-day management. As Huang puts it, Chinese investors got the feeling that they were meant "to only pick up the bad apples with no money to make."

"Business is business. Of course they're uninterested," he explains.

Statistics by the Investment Commission under the Ministry of Economic Affairs show that Chinese investors poured US$140 million into Taiwan in the first nine months of 2012. While this amounts to a three-fold increase over the same period last year, President Ma Ying-jeou still feels that total Chinese investment in Taiwan – US$310 million since direct cross-strait investment became possible in 2009 – looks "really bad." Ma asserted that moving toward greater trade liberalization for Chinese investment is "the only direction to go."

The financial industry, which has been serving the role of middleman in the cross-strait economic relationship, is optimistic that the plans for demonstration zones free of regulatory hurdles for Chinese investors will become reality.

Estimates from investment banking circles hold that if the legal framework for the demonstration zone scheme is finalized, within a short period Chinese investment will increase by US$300 million (around NT$9 billion), roughly the equivalent of total Chinese investment between 2009 and now.

National Security Problems Remain

In the face of a continued exodus of domestic companies, Taiwan's cash-strapped government doesn't seem to have an alternative to removing investment obstacles to lure Chinese investors.

A cabinet official conveys the government's conundrum: "The central government doesn't have money, and the local governments are even worse off. So if we want to use infrastructure projects to stimulate the economy, we can only attract private capital or foreign capital. Of course, Chinese capital is also an option."

However, some experts call for more caution. They argue that granting Chinese investors WTO treatment, which amounts to an almost complete opening at least within the demonstration zones, will deal a major blow to Taiwanese industry and cause problems with regard to national security and social justice.

Not only have there been widespread misgivings over the possibility of granting Chinese investors greater access to high-tech, finance, telecommunications and other industries that determine Taiwan's competitiveness or impact the personal information security of the Taiwanese people, but many scholars, such as National Taiwan University economics professor Kenneth S. Lin and former Mainland Affairs Council vice chairman Tung Chen-yuan, have also voiced apprehension that large Chinese companies still operate along lines very similar to sovereign wealth funds. Should such companies establish factories in Taiwan or acquire Taiwanese companies, they will inevitably get access to Taiwanese technology and compete with domestic companies at the expense of Taiwan's industrial environment.

Another serious point of contention is that if in the future Chinese investors become involved in an array of ventures, as large as infrastructure projects and as small as food processing, and problems with public safety arise, who will be held accountable?

Chinese Investment Already Here

Chuang Meng-han, associate professor at the Department of Industrial Economics of Tamkang University, has done extensive research about Taiwan's real estate market. He asserts that "much much more Chinese capital than government statistics show has flown into Taiwan." Chinese investors have bought local real estate for a long time, either by channeling their money through a third territory or by using Taiwanese companies as their front.

Many rich Chinese are buying Taiwanese real estate in order to transfer their assets abroad. These properties are by and large left empty. High home vacancy and a psychology of expectation in the market that is indirectly causing sustained inflation of Taiwan's urban real estate prices, has engendered inequity in housing.

"The key point is that the government ought to take responsibility for hammering out an industrial policy that rebuilds Taiwan's competitiveness," one former finance official says with grave concern. A raft of Taiwanese industries, from basic infrastructure, parts of the high-tech sector and some lower-ranking banks, to universities, local hospitals and even the capital market, now chronically suffers to one degree or another from either insufficient capital or bad management, the former official acknowledges, but he warns: "When problems crop up you cannot just look for Chinese investors to play the role of firefighters. Taiwan needs to rely on herself, and take the difficult road. That's the only way to truly gain a strong foothold internationally."

Translated from the Chinese by Susanne Ganz