China's Ties with Taiwan Thaw

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Stable Credit Rating for Taiwan

Top Taiwanese companies have tied their corporate fortunes to the mainland. For instance, Taiwan Semiconductor Manufacturing (TSM), the world's top contract-producer of chips for other companies, has a semiconductor operation in Shanghai, and founder Morris Chang joined Siew on the trip to Boao. The heads of Walsin Lihwa, a large Taiwanese maker of wires and cables with extensive China operations, and Taiwan Cement with six plants on the mainland, also joined the Siew delegation. On Apr. 11, Standard & Poor's (like BusinessWeek, a part of the McGraw-Hill Cos. (MHP) raised Taiwan's credit rating from negative to stable, citing the expectation of new political and economic stability on the island.

Why the breakthrough now? Well, of course, the new Taiwan administration in which Siew will serve as vice-president is a huge improvement from China's perspective. Beijing's leaders have long reviled outgoing President Chen and his DPP for their pro-independence stance. Beijing is much more comfortable with a KMT administration that agrees that Taiwan must remain part of the mainland. After meeting with Siew, Hu said that it was his administration's intention now "to think deeply about cross-Straits economic exchanges and cooperation under the new circumstances," adding that in the last eight years the two sides had "suffered twists and turns for reasons known to all."

Indeed, the KMT won last month's election campaigning for closer political and economic cross-Strait relations, opening the island to Chinese tourists, and opening up direct air flights, a key long-awaited goal. To date, all flights between Taiwan and mainland China must first touch down in Hong Kong or Macau before continuing to the mainland, a detour that adds hours of travel time. "Starting direct flights and normalizing cross-Strait economic and trade relations will benefit both sides and help to eliminate regional tensions," Siew said, according to a statement issued by the Taiwanese government. If all goes according to plan, direct charter flights will start as early as this summer, with direct commercial flights by sometime next year.

A Distraction from Olympic Protests

Equally important, Chinese officials are eager to distract world attention from the ongoing problems in Tibet and protests swirling around this summer's Beijing Olympic Games. A breakthrough with Taiwan certainly qualifies as good news for the international community, including the U.S. (which has vowed to support Taiwan if hostilities ever broke out in the Taiwan Strait). Just before Siew's visit to the mainland, U.S. Deputy Secretary of State John Negroponte called the expected meeting "a good way forward" for lessening China-Taiwan tensions.

Nevertheless, this isn't the first time Taipei and Beijing have appeared on the verge of a real diplomatic breakthrough. Throughout the 1990s the two sides held a series of promising meetings that later broke down over the crucial issue of how to define the two governments' roles (China refuses to recognize the Taiwanese authorities as heads of a state.) So while rapidly improving economic ties are expected with the KMT poised to take charge, real strengthened political ties will be much more difficult.

Roberts is BusinessWeek's Asia News Editor and China bureau chief.