For decades, the Kuomintang was an unmentionable word in China. But on May 1, the Taiwan regime inched a tad closer to the Big Brother's bear-hug as the extravagant Shanghai World Expo got underway.

Like Hong Kong, which is increasingly being swayed by Chinese policymakers and Shanghai market trends, so too is the savvy Taiwan bourse. The TAIEX last week closely followed trends in China, especially the path of the crucial Economic Cooperative Framework Agreement or ECFA, which is expected to be signed between Beijing and Taipei in June.

The ECFA, when sealed, will have substantial impact on the mainland, Taiwan and global markets. Apart from a plethora of trade and tariff issues, financial services will be high on the list of priorities for preferential access under ECFA.

The Taiwanese government has several proposals on the table to loosen restrictions on their companies investing in mainland China. Taiwan's financial industry is lobbying hard to participate actively in the increasingly important mainland Chinese and Hong Kong markets.

Under the government's new proposals, Taiwanese brokerages would be allowed to invest in their Chinese peers, Taiwanese mutual funds would be able to buy Chinese and Hong Kong stocks, institutional investors backed by Chinese capital would be able to invest in the Taiwanese market and Hong Kong-listed companies would be able to seek second listing in Taiwan.

High trade zone

The Shanghai and Taiwan markets have more or less operated in their own parallel universes, but cross-strait trade has been growing by leaps and bounds.

Mainland China is already Taiwan's number one export market, with nearly 40 per cent of its exports bound for China. And despite investment restrictions, mainland China has attracted more than two-thirds of Taiwan's foreign investment, with Taiwanese companies having invested more than $120 billion (Dh441.3 billion) in Chinese businesses since the early 1990s.

Buoyed by the dual trends — heavy exports to the mainland and the forthcoming accord — foreign funds last week added to their holdings in Taiwan stocks. But this led to a flutter on the currency side.

Like the mainland, Taiwan too fears the pitfalls of a strong currency. The Taiwan dollar has advanced 2.1 per cent this year as funds based abroad bought a net $4.4 billion Taiwan shares, according to stock exchange data.

Last week, overseas investment in the island's stocks drove the currency to a 20-month high. Also, expectations of the yuan gaining in strengthen is also driving up the Taiwan dollar.

Exporters of Taiwan's phenomenal electronics industry find little cheer in this trend as a stronger Taiwan dollar threatens their margins. According to media reports, the Central Bank of the Republic of China (Taiwan) was forced to intervene to stabilise the exchange rates last week.

A Taiwan trader said that foreign investors have every reason to send in funds, as there will be more gains for the Taiwan dollar if the yuan rises and also due to the imminent trade agreement. Standard Chartered analysts report that currency investors should buy the Taiwan dollar using forwards contracts due in six months. "The economy is in recovery and the next two months may bring two key events that could be very positive for the Taiwan dollar; the de-pegging of the dollar-yuan and trade liberalization between Taiwan and the mainland," according to the analysts' note.

Taiwan with its free market economy and liberal stock exchange which allows foreign listings couldn't be a greater contrast to the Shanghai bourse.

After six decades of animosity, the mood between the mainland and island has improved greatly on both sides, but it will be years before China goes down Taipei's bourse path.

 The columnist is a writer based in China.