Taiwanese companies will not be deterred from investing in China even though the government plans to tighten its rules to reduce the island's economic reliance on its rival amid escalating tensions, analysts said.
The issue highlights the dilemma Taiwan's authorities face in trying to shore up the local economy even as manufacturers of everything from towels to technology are flocking to China to take advantage of its huge market and low costs.
Citing Beijing's hostilities towards Taipei, Taiwan's China policy decision-making body known as the Mainland Affairs Council (MAC) last week unveiled new measures designed to restrict corporate investments in the mainland.
The rule will add a layer of "policy review" on some China-bound projects, over and above the standard regulatory hurdles companies already face.
Grand Cathay Investment Services Corp chairman Tu Jin-lung said the tighter rules highlight fears that the island's economy may be getting marginalized due to a flood of outbound investments in recent years.
"Industries such as shoes, toys, umbrellas and towels here have suffered from relocation of manufacturing from Taiwan to China," he said, noting the weak employment situation in those sectors.
In the latest trade dispute between Taipei and Beijing, Taiwan's International Trade Commission ruled last week that imports of China-made towels had caused "material injury" and "market disruption" and said Taiwan's towel industry has been in a recession since 1999.
Taiwan would hold a hearing in 30 days on possible import relief measures and submit a recommendation to the economics ministry to decide whether such measures would be adopted.
Chinese-made towels have taken over 70 percent of the local market since Taiwan joined the World Trade Organisation in 2002.
However, regulatory controls may not effectively curb outbound investments, Tu said.
"You cannot stop" companies from investing in places where they see an opportunity to make money, he said, adding that "no one will invest in areas that allow no profits."
China has been attracting investments due to huge market prospects and low manufacturing costs, he noted.
"While the new regulations may increase barriers for China-bound investments, it is difficult to stop corporates from chasing after profits," Tu said.
Victor Lin, head of domestic institutional sales at JP Morgan Taiwan Securities, said the new rules "are unlikely to help corporate competitiveness" and may actually make Taiwanese companies operate less efficiently.
Resources like capital or human talent usually move to areas that can generate best returns, Lin said.
In addition to the new approvals, applicants seeking to invest in China will also have to agree to special audits of their China operations.
Directors or managers of public companies seeking to make individual investments in China will in some cases have to seek board or shareholder approval at the company's annual meeting, the MAC said.
The government will seek parliamentary approval for a law to protect sensitive technologies and strengthen audit and management of financial firms' operations in Hong Kong and China, it added.
Statistics from the Investment Commission show that Taiwan approved 34,601 China-bound investment applications worth 48.17 billion dollars from 1991 until February this year.
However, economists said they believed the amount of the island's investments in China may have topped 80 billion dollars, meaning a big chunk of the money going into China is already being invested without Taiwan's official approvals.
The technology sector in particular is investing heavily in China.
According to the Directorate General of Budget, Accounting and Statistics, Taiwan's total output of hardware information technology products reached 73 billion dollars in 2005, of which 79.5 percent was accounted for by plants in China.
Taiwan split from China in 1949 after a civil war. Until the 1990s, Taipei banned its companies from investing in China but later relaxed the rules.
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