Asia Weekly

Friendlier Horizons

Week Ended: July 4, 2008

Recent volatility in financial markets has perhaps distracted investors' attention from some relatively subtle but important events that indicate ways Asia's geo-political risks may be evolving. For the first time since World War II, a Japanese naval warship entered a Chinese port in late June as part of a humanitarian earthquake mission. The ship's visit—a five-day port call to the Guangdong Province naval base—is being hailed by some military and diplomatic analysts as part of a broad and gradual reconciliation between Japan and China. Relations between the two nations have long been cool, stemming largely from China's lingering resentment of Japan's conquest and occupation of China for 14 years, starting in 1931.

The mission comes a month after Chinese president Hu Jintao made a historic five-day visit to Japan, the first such visit by a Chinese head of state in a decade. To further signal an improving working relationship, the two countries also recently agreed on terms for the joint development of underwater natural gas fields in the East China Sea. These waters have been in dispute between the two nations for more than three decades but both sides have agreed to shelve competing territorial claims. Under the breakthrough deal, Japanese companies will be able to invest in a Chinese-run project tapping a natural-gas deposit, while the two countries will explore as-yet-undeveloped undersea resources.

China's previously contentious relations with Taiwan, which China has long considered a renegade province, have also taken a step toward friendlier affairs following a landmark agreement to ease travel restrictions across the Taiwan Straits. Under the new pact, China and Taiwan will be able to operate 18 direct round-trip charter flights on weekends, with service to start July 4. Taiwan's tourism industry is eagerly awaiting the influx of new visitors from mainland China. Likewise, the mainland's public reaction to the deal has been positive, with thousands already applying to book Taiwan tour packages.

Elsewhere in Asia, North Korea submitted a declaration of its nuclear work, said to outline the amount of plutonium it has produced at its main reactor. The gesture prompted President George W. Bush to announce plans to remove the isolated nation from the State Department's terrorism blacklist. Though heartening, the move has not been free of criticism.

Historical legacies and political sensitivities surround these developments, making interpretations of them less than straightforward. Old disputes will not be settled easily. However, amidst the current volatility in markets, these events suggest the region is taking steps toward a future marked by greater cooperation, and perhaps, peace.

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The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews International Capital Management, LLC does not accept any liability for losses either direct or consequential caused by the use of this information.