Market shows mild jitters over Taiwan election

Stocks in some Taiwanese firms fell early today, two days after the island nation--a crucial center of high-tech manufacturing--elected a new president despite blunt warnings from China that the election would further strain relations between the countries.

As a result, shares of Taiwan Semiconductor Manufacturing fell $8, or more than 13 percent, to $51.50 the on New York Stock Exchange. TSMC's volume topped 4.6 million shares today, about four times the average. Taiwan's stock exchange has been dropping since last week, causing the government to inject about $2.6 billion to help stabilize the market, according to the China Post.

The ultimate reaction of the political parties involved is of substantial interest to high-tech investors, as Taiwan is a manufacturing center for many leaders in the computer industry.

The island produced approximately $40 billion in hardware last year and is expected to account for $58 billion in 2002, according to government statistics. Seventy-five percent of the world's motherboards were produced there last year, along with 58.2 percent of the monitors and 39.3 percent of the notebooks, according to the Institute for Information Industry.

Despite their reliance on Taiwan, U.S. companies' shares showed little reaction partly because of uncertainty over China's response. Unlike an earthquake last year that disrupted manufacturing on Taiwan for weeks, gauging the short- and long-term effects of the election remains difficult.

China has signaled its displeasure with the election results, but it must weigh its actions carefully because Taiwan is one of the larger investors in China.

"China may be concerned over the new president's (pro-independence) image?but I think the stock market is a short-term issue," said Max Wu, president and chief operating officer of Acer America, a unit of Taiwan-based computer maker Acer. "I think as long as Taiwan keeps a friendly dialogue with China and stays focused on economic development, these political issues will move away from the stock market."

Analysts said that investors may initially be wary of the recent events, but it still remains to be seen how the political situation will play out.

"Investors are afraid, (and) there's probably some capital flight," said analyst Lucas Ward of Chase H&Q, who covers Taiwan Semiconductor. "If China comes out with an (extremely) negative reaction, that could affect the markets further.

"The political situation can have an impact in the short term," Ward added, "but the fundamentals (for Taiwan Semiconductor) are basically sound."

An increase in tensions could also cause ripples in the U.S. business climate. "(The situation) is a big risk for the semiconductor industry," said Mark Fitzgerald, a semiconductor analyst at Merrill Lynch.

"Taiwan is a major center for semiconductor production, so any missiles flying over the island would obviously present difficulties for Taiwan and U.S. companies," he said. "Altera, PMC-Sierra and Broadcom are all companies that heavily depend on Taiwan for chip manufacturing.

"We've gone through this before," he added. "Last time, they were shooting missiles; fortunately, this time it's just posturing."

Few issues can cause relations between the two countries to sour faster than the subject of China's sovereignty over the island country. Chiang Kai-shek moved his government to Taiwan from mainland China in 1949 after his defeat by the Communists. His Nationalist party has run the country ever since.

Yet the election of Chen Shui-bian in Taiwan's second election is the first time the Nationalists have lost, an act that has caused street celebrations, rioting and the resignation of lame duck president Lee Teng-hui from his leadership position in the powerful Nationalist party. Chen will assume his presidential duties May 20.

China and Taiwan have operated as separate countries since 1949, but China considers Taiwan a renegade province and strongly feels the island should be a part of the mainland. The Chinese have been encouraged in this quest recently by the return of Hong Kong and Macau, which once were Western colonies.

The Taiwanese population seems split on its opinion of China. The government refers to the island as China, as do many of the residents older than 45. Several maps in the country still identify mainland China as part of the Republic of China, the official name for Taiwan. Nonetheless, younger members of the population refer to the island as Taiwan and state that they have evolved as a separate, distinct culture.

Taiwan's first democratic presidential election was held in March 1996, an act China considered so rebellious that it conducted war games near the island and fired missiles into the Taiwan Strait.

Even though Fitzgerald would not make any political forecasts, he does believe that "it's not in either country's (economic) interest to come to blows over this."

Acer's Wu expressed optimism for the country's future.

"In the past 20 years, Taiwan has proved with limited resources that it can become an economic power, and now it has proved that it is another miracle of democracy with the recent election," he said.

Wu also believes the stock market fluctuations will pass, as long as relations between the countries stay on good terms.

News.com's Michael Kanellos contributed to this report.