Much has been written about the long-term potential of Chinese stocks, which are being driven by the sustained economic boom of the world's most populous country. Despite a few concerns -- namely inflation and a short supply of some essential raw materials -- China's economy keeps rolling. Its economy expanded +10.1% in the second quarter, which was slightly lower than economic forecasts, but still at a pace that's akin to the sprinters who'll compete in the Beijing Olympics in just a few days.

One of the surest beneficiaries of China's growth is the Republic of China, the island nation off the mainland, better known as Taiwan. One of the wealthiest and most developed economies in Asia, Taiwan has a robust technology industry that is a natural complement to China's low cost and efficient industrial base. And for investors, this could be a case of history repeating itself. When Taiwan first lifted its travel ban to the mainland in 1987 and allowed capital investment in China for the first time, the Taiwanese market went on a three year run, increasing nearly +1000%.

Taiwan Policy Shift Thaws Once-Icy Relationship

The fact that China's economic growth is doing tremendous good for Taiwan is ironic, as the two countries have engaged in a decades-long family feud over sovereignty that remains contentious. But in pragmatic fashion, they're increasingly setting aside their differences to work together economically.

That process was speeded up when Ma Ying-jeou became Taiwan's president in May. The leader of the Nationalist Party (also called the KMT Party), Ma was elected on a platform of stronger economic growth and closer ties with mainland China. Ma's presidency follows eight years of administrative policy which took a harder line against mainland China.

Taiwan already is a major investor in China's economy, and a million Taiwanese citizens live and work on the mainland. And Ma's agenda to further formalize those economic ties is well on its way to being implemented. 

The commencement of direct commercial flight service was crucial because it shortens the travel time between Taipei and some key mainland cities by up to 75% over existing, indirect routes. And just a couple of weeks ago, the Taiwanese cabinet approved new rules allowing Taiwanese companies to invest up to 60% of their net worth in mainland China, versus 40% currently.

Ma's policy of engagement could eventually even lead to a formal peace agreement that acknowledges, if not officially recognizes, both countries' sovereignty.  In practical terms, that has already occurred. But by reassuring the world that armed conflict is not going to happen, China and Taiwan could increase confidence in each others' economies and financial arrangements -- that will help the stocks of companies in both countries.

In addition to improve Taiwan's relationship with mainland China, Ma wants to strengthen trade relationships with other countries and establish Taiwan as one of the more flexible and progressive trade partners in the world.

Recent Pullback Has Investors Locking in Higher Yields    

After having sold off along with other international markets in recent weeks, Taiwan's stock market now is very attractively valued. Taiwanese stocks are trading at less than 11 times expected 2009 earnings -- versus about 13 for Hong Kong's market and 12 for the United States. What's especially attractive about Taiwan is that its average stock yields 5%, providing many opportunities for investors to lock in outstanding yields and participate in the gains about to unfold in Taiwan. 

A number of Taiwan's most attractive stocks don't trade on U.S. stock exchanges. And investors would be smart to investigate Many of Taiwan's And there are a number of funds that investors should consider. Both The Taiwan Greater China Fund (NYSE: TFC) and the iShares MSCI Taiwan Fund (NYSE: EWT) are solid investments with stellar track records, but their heavy weighting in tech stocks has held yields below what income investors should expect from this region.

My favorite Taiwan investment is a closed-end fund that has raised its dividend more that +140% over the last three years. Unlike most Taiwan-focused funds, almost 50% of its holdings are in mid to small-cap companies which have a history of rebounding further and faster after a market slowdown. And smaller companies should also capture regional economic benefits better than many of their larger counterparts which have developed primarily as U.S. exporters.   

Of course the best news of all is this fund has made payments of $3.618 per share over the past year for a 21.4% yield based on recent share prices.            

For the last six months, I've been keeping my High-Yield International newsletter subscribers up to date on the warming relationship between China and Taiwan -- and the red-hot opportunities its creating for income investors. And Taiwan isn't the only country with outstanding prospects and oversized yields that I cover.

My staff and I have just put the finishing touches on a report that features some of the best regions in the world for high-yield investors like yourself.  In this free report, I've also included the name of my favorite Taiwan-focused fund.  Please visit this link to instantly access your free report and to learn more about High-Yield International.    

-- Nick Lanyi
Editor, High-Yield International