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Taiwan & China Sign Landmark Trade Deal

CNBC Asia Pacific
Tuesday, 29 Jun 2010 | 7:11 AM ET

This is a transcript of top stories presented by China's CCTV Business Channel as produced by CNBC Asia Pacific.

Hello to our viewers all over China.

You're watching "Asia Market Daily", a special segment co-produced by CCTV Business Channel and CNBC, first in business worldwide.

I am Saijal Patel and I'll bring you the top stories in Asia today .

Asian stocks reversed their early gains as markets were weighed down by a sharp fall in Chinese shares.

In Japan, the Nikkei 225 fell 1.3 percent.

Exporters such as Toyota, Nissan and Mitsubishi Electric were hit hard by a strengthening in the yen.

In South Korea, the KOSPI tracked the losses seen elsewhere in the region.

Losses in blue chips such as Hyundai and Hynix sent the index lower by 1.4 percent.

Hong Kong stocks also dragged lower, while most investors wait on the sidelines. Steve Tse of BEA Union Investment Management tells us why.

(SOT) Steve Tse, Research Manager, BEA Union Investment Mgmt:

"Lately, everybody's actually waiting for the mega merger from the Ag Bank, so the market has been quite quiet. Probably we will see, probably tomorrow.. there will be more action as we near half-year end."

China's A-share market also hit a 14-month low today on concerns over the upcoming impact of Agricultural Bank of China's huge IPO and how it could draw cash away from other stocks.

Ag Bank has set a lower-than-expected pricing-range for its Shanghai IPO versus its Hong Kong offering, due to anticipated weaker demand from local investors.

Across Asia, the pace of global recovery is also weighing on investor sentiment. Some analysts out there, including Markus Rosgen of Citi, says this does not bode well for the markets in the coming quarter.

(SOT) Markus Rosgen, MD & & Head of Asia ex-Japan Equity Strategy, Citi:

"We don't believe in a double dip, but clearly global growth is slowing, and surely it's causing some concern amongst some investors. If you look at domestic equity in Asia, it is still contracting rather than expanding, so that's going to be some headwind, so between now and September, we actually think markets will head lower."

Meantime let's take a look at one of the top stories in Asia today --

In Chongqing today, China and Taiwan have signed an agreement that's expected to boost what is already about a hundred-billion dollars in annual two-way trade.

The deal is seen as the most significant pact between the two in 60 years.

We have Emily Chan in Hong Kong with the details.

That's right, Saijal....... The Economic Cooperation Framework Agreement, ECFA for short, helped boost the Taiwan Weighted Index with a more than 1 percent rally at the open, but the gains quickly faded.

The agreement will deregulate the financial sector, allowing Taiwan banks quicker access to the mainland market.

Taiwan financials were mostly lower, with the exception of Fubon Financial, which is the only Taiwan bank already with exposure to the mainland market, through its 20 percent stake in Xiamen Commercial Bank.

There's also an early harvest list, which includes 539 Taiwan goods that will see its tariffs slashed to zero over 3 years, which account for about 15 percent of Taiwan's exports.

It covers textiles, auto parts, machinery and petrochemical sectors.

Analysts say airlines and property stocks should also benefit from the deal.

And asset plays, companies holding large amounts of land to be developed, like Far Eastern Corporation and Taiwan Fertilizer.

Formosa Plastics, says this is an era of thin margins, and it would be difficult for us to compete without the agreement.

The chairman of Acer, world's No.2 computer maker, said it would bring Taiwan back to a normal position in establishing FTA relationships with its important trading partners.

Markus Rosgen from Citi remains positive on Taiwan.

(SOT) Markus Rosgen, MD & & Head of Asia ex-Japan Equity Strategy, Citi:

"Well, the interesting thing about Taiwan is that - number one, is still very much a concern as underweight amongst global investors. So global investors have put some money back but by no means as much money as they've taken out across the last couple of years. And no. 2, we've looked at the valuation, or you look at the free cash flow generation of corporate Taiwan, it's actually very strong, I mean as a sector for instance, tech, cash on the balance sheet, so if you take a multiple view, you can certainly make 50 percent of your money across the next 12 months if you're a bit more conservative, and we're looking at a 15 percent return for the Taiwanese index, but in terms of the delivery of profitability, delivery of earnings, delivery of dividends, Taiwan ranks really quite highly in Asia."

The Taiwan government is banking on the agreement to create 260,000 jobs and to boost GDP by 1.7 percent each year.

Back to you Saijal.

Thanks Emily.

On the same note, some analysts have been saying that the initial benefits of the deal are heavily-skewed towards Taiwan businesses.

But there are those like Andrew Leung of Andrew Leung Consultants, who say that the benefits are balanced-out and will help strengthen ties.

(SOT) Andrew Leung, Chairman, Andrew Leung International Consultants:

"In Shanghai alone, there are over a half million Taiwanese businessmen together with their families in Shanghai. And then a lot of the manufacturing bases and science parks you can see the presence of Taiwanese companies. So already, the Taiwanese are closely related to the China market, but I think with this agreement, the ties are further strengthened and we are not just talking about those industries covered by the agreement. There are other industries as well, for example logistics, tourism, and of course the financial services cut across all sectors."

Analysts also say Taiwan President Ma Ying Jeou's move to sign the agreement represents a sea-change for Taipei, and represents a chance for the island to fulfill its potential as a regional center for business.

(SOT)

"Previous, the former President Chen Shui-bian had lost his political mandate because they were trying to push the envelope too far, which is bad for businesses, bad for the pockets of most people and that's why this agreement has the support of most Taiwanese people, and in fact it translates into an improving of popularity of the current China, mainland-friendly Ma Ying-jeou administration."

Before we go, a look at some business surveys that were out today.

The EU Chamber of Commerce says there's improved economic optimism amongst firms operating in china

78 percent of the 500 firms surveyed say they're confident about the country's growth prospects.

However, when it comes to their own corporate profit outlook for the next 2 years, only 34 percent remain confident.

Most cited increased domestic competition and regulatory uncertainty as sources of concern.

And... over on the mining front:

It's quite a different risk picture that the sector is facing this year, says Ernst and Young, which released its top 10 risk list report today.

While capital allocation was not a strategic area of concern a year ago, Mike Elliott , Global Mining and Metals Leader at EY says, it's now the number one area of risk that firms have had to tackle frequently this year.

(SOT) Mike Elliott, Global Mining and Metals Leader, Ernst&Young

"We found that a lot of the inputs to capital allocation decisions have been extraordinarily volatile over the last 8 months, so commodity prices, currency rates risk appetites, boards and executive groups. We're also seeing the wider capital markets are providing capital, the shift from large amount of debt to being predominantly equity-funded. And also, as you've been mentioning, the changes in tax regimes around the world have also been an important ingredient in that capital allocation decision-making."

Other areas of risks include skills shortage and insufficient infrastructure, which could lead to project delays.

Tax regime changes have also made the list, with mineral rich countries now seeking higher royalties from mining firms benefiting from their nation's reserve.

(SOT)

"Well I think this existed even before the resource super-profits tax was announced in Australia. In fact, a lot of their work around this indicated they increased as a risk, and that's because the mining sector recovered so quickly, relative to other sectors, so a lot of countries around the world see that cash flow is being created by the mining sector, and think of it as an easier target in order to tax and replenish treasuries. And it's not just royalties and taxes invoking things such as looser clauses in their license agreements, or mandatory government participation, rather forms of nationalism happening out there."

EY says resource nationalism is now part of a greater global trend and seen in countries like Australia, Canada, India and China. With a quick recovery in the sector post global crisis, the report says firms need to pay closer attention to supply side issues which are re-emerging.

And .. that wraps up today's business highlights.

I'm Saijal Patel from CNBC and you're watching Asia Market Daily — a co-production with CCTV Business Channel.

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