The wave of outward investment from China, amounting to US$68 billion in 2010 according to the 2011 UNCTAD World Investment Report, appears to be skipping over Taiwan despite government efforts to pull in FDI from the mainland.

Chinese businessmen have only invested US$272 million in the island since 2009 when rules were relaxed, a tiny fraction of the US$80 billion that 80,000 Taiwanese companies have invested in China.

That is probably because the rules prohibit them from having board control. Another prohibited them from acquiring more than 10 percent of existing Taiwanese technology companies. Taiwan has not attracted any Chinese investment in anchor sectors, such as panels and chips, since liberalization began. Also, the sectors that the Chinese would really like to get their hands on – finance and banking – remain off limits.

Although Taiwan’s cabinet last week liberalized rules for a third time to allow for increased Chinese investment, the measure is expected to have little impact, frustrating government officials.

The latest measure allows mainland investors to hold shares in 115 types of manufacturing businesses, 23 service ones and 23 in public construction.

The two previous waves of investment rule relaxations also failed to create significant inflows. In the first round of relaxations implemented in 2009, Taipei allowed FDI from the mainland in 192 items that were not considered sensitive, competitive, low profit or mature – the list contained textiles, garments and clothing accessories, electronic components, computers, mobile phones, automobiles and plastics. But that only brought in some US$140 million.

Then, in March 2011, panels and semiconductors together with 40 other sectors were added to the list amid predictions that Chinese FDI would grow dramatically.

Economists and officials believed that mainland TV brands would form strategic alliances with LCD panel firms in Taiwan in order to stabilize their component supply, while the Taiwanese firms in turn would be able to afford technology upgrades to compete against rival South Korea.

Under the terms of the new liberalization, subway, road and station construction will no longer be off-limits to the Chinese, paving the way for mergers and acquisition, Chinese investors will be able to hold 49 percent in local firms that are not in key manufacturing sectors, such as flat panels, semiconductors, LEDs and solar batteries.

Yet despite this third wave, the Taiwanese government's own target for investment from China this year is set at a humble US$400 million. By comparison, Americans had investments worth US$2.15 billion on the island last year, Singaporeans US$1.02 billion and the Japanese US$970 million.

Economists in Taipei agree that a massive inflow of funds from across the Taiwan Strait in response to the third wave of relaxations is hardly expected.

“There continue to be restrictions on mainland investment in Taiwan within many sectors – most notably land [to prevent speculation in the property market]”, said Ronald A. Edwards, an expert on China's political economy and professor at Tamkang University.

But also political risks loom large in the eyes of many potential mainland investors, Edwards said. “Any sudden massive influx of investment from the mainland is bound to cause a political reaction in Taiwan that works against further investment or even obtaining the returns on the investment.

Edwards also pointed out that a crucial agreement is lacking between Beijing and Taipei that protects mainland investment and its returns.

“Although this appears to be on the agenda in the near future, Taiwan's presidential elections cycles are only four-year periods. That raises the specter of possible roll backs of such agreements, should the [anti-unification Democratic Progressive Party] DPP take over the administration,” Edwards said.

Talks have stalled on a cross-strait investment protection agreement with guidelines settling legal disputes between businessmen mainly because Taipei demanded international arbitration, which Beijing opposes as it would imply Taiwanese statehood. Another supposed reason is Beijing's disappointment over Taipei's conservative attitude in regards to lifting restrictions on Chinese FDI.

Both sides have recently repeatedly signaled that the pact could be signed by July, however.

There is good money to be made for foreign investors in Taiwan as long as they don't happen to come from mainland China, Edwards said:

“Many of Taiwan's companies are competitive in the world market. But mainlanders face unique risks. [In future,] they may even be subject to restrictions in actually transferring their returns to the mainland or pulling out their investment.”

Hu Sheng-Cheng, an economist at Academia Sinicia and former minister of the Cabinet-level Council for Economic Planning and Development (CEPD), told Asia Sentinel that the hoped-for shot in the arm of Taiwan's economy will most likely fail to materialize, not only because foreign investments to the island on the whole have been decreasing lately.

“Mainland investment in Taiwan has three ends: profit-making, the obtaining of technologies and the obtaining of operation rights. But many limitations remain in regards to the latter two,” Hu said.

Hu argued that price-to-earnings ratios (P/E ratios) suggest that mainland investors cannot expect too much of a profit making, either.

“Taiwanese enterprises' P/E ratio was 16.74 in January, the mainland's 14.00 and Hong Kong's 10.64. This shows that investing in Taiwan is not as profitable as on the mainland and in HK. That's why the Taiwanese government has put its target for Chinese FDI so low,” Hu said.

He concluded on a somewhat disturbing note. While China spurns investing in Taiwan's technology firms and their like, it will be much more interested in the financial sector. Domestic financial institutions, suffering from intense competition, have been pressuring regulators to axe the 5 percent cap on Chinese banks' stakes in their Taiwanese peers, and local media speculated that Taipei harbors concrete plans to raise the limit to 20 percent.

“Through the banking pipeline, the mainland can obtain detailed information about Taiwan's economic operations; this, and not FDI, will enable them to directly control Taiwan's economy”, Hu said.