Yesterday afternoon the mighty, glistening bulk of the Rhapsody of the Seas glided south from Kaohsiung harbour and out towards Hong Kong. The size and presence of the Royal Caribbean cruise vessel were nothing out of the ordinary - Taiwan's biggest commercial port sprawls on an epic scale and handles more annual tonnage of shipping than Rotterdam - but a very definite break with the past was the nationality of the passengers streaming back up the gangplank. Here was an unprecedented boatload of mainland Chinese tourists, who had come to see the sights of the mysterious “rogue” republic across the sea.

The authorities in Kaohsiung were the first to admit that the tour party, which numbered only 668, was not enormous, nor was its expected impact on the local economy. But it was symbolic of change: the beachhead in a lucrative capital invasion for which the industrial, entrepreneurial city in the south of Taiwan has been preparing greedily for years.

The business community of Kaohsiung - the beating heart of the export-driven Taiwanese economic story - has a well-honed trader's eye for political shift. Specifically, it knows what a tidal wave of liberalisation and capital looks like as it ripples the horizon.

If, as many now predict, China and Taiwan do not go to war but become significant investment partners, it is Kaohsiung and its rich industrial and services base that stands to reap the most spectacular rewards.

The lunar new year visit of the mainland Chinese tourists was the latest in a number of signs to have generated considerable excitement among investors, signs that the simmering animosity between Beijing and Taipei may, finally, be cooling.

January's legislative elections in Taiwan, which dealt a crushing defeat to the ruling party, have, according to analysts at CLSA Securities, “swung the balance of probability in Taiwan's unpredictable landscape firmly in favour of breakthroughs on cross-strait relationships”.

If the momentum towards rapprochement continues through presidential elections in March, business leaders say, the transformation will follow quickly.

Until now, Taiwan has played a curiously marginal role in the extraordinary growth of mainland China. Its electronic and manufacturing companies have invested there to the (estimated) tune of £50billion, but any real economic partnerships and development have been stymied by politics.

Taiwanese banks, for example, cannot lend to Taiwanese companies to fund operations on the mainland. Strip away the restrictions, however, and factor-in China's reported eagerness to pour capital into Taiwan and the scene on both sides of the Taiwan Strait is transformed. Looked at from Kaohsiung, the People's Republic of China represents an open target for the city's sophisticated corporate chieftains.

If Taipei remains somewhat austere, Taiwan's secret optimism on the China front is quickly betrayed on the streets of Kaohsiung. This is a maritime city that relishes the future - and not only because the volume of trade at the port hit record levels last year. Steel, the services sector, electronics and other manufacturing industries are readying themselves for a renaissance. Deluxe hotels and boutiques throb with expenditure. The immense and newly opened Dream Mall flows through prime city real estate as testimony to Kaohsiung's mercantile impulse. Last weekend, more than 350,000 people squeezed into the sparkling new carriages of the city's Mass Rapid Transit system, which formally opens next month.

The city, which will host the World Games next year, also has a growing sense of its importance beyond being the factory and transport hub of Taiwan. The country's first “bullet train” service - now a year old - transformed the journey from the capital to Kaohsiung from a tiresome slog to a swift commute. It has been so successful that Uni Air has abandoned its air shuttle.

Taiwanese companies based in mainland China have begun to repatriate as business conditions have changed. What is now a trickle of companies is likely to become a flood, according to officials at the Ministry of Economic Affairs, and it is to Kaohsiung and its growing number of tailor-made economic zones that these returning companies are being directed.

Kaohsiung's secret, according to its residents, lies in more than its aggressive commitment to trade. This is, after all, a city that invents things at a prodigious rate. American patent filings rattle from its industrial labs like bullets from a machinegun: many of them relate to the city's thriving semiconductor industry - novel processes that use less lead or raise production quality to much higher levels. Others are patents that reveal the growing strength of the city's software industry. Most recently, a team of local scientists “saved” a critical part of the city's famous seafood dining culture when it developed a technique for farming cuttlefish in a fully controlled environment.

However, there remains a more pressing question of whether Kaohsiung's celebrated ingenuity can devise a solution to a dire problem facing the region. Behind rice, Taiwan's second-biggest crop is the betel nut, a date-like fruit that is chewed for a nicotine-type buzz. The nut is enjoyed across southeast Asia, but nowhere is it celebrated so joyously as in Kaohsiung, where an annual festival is held in its honour.

Some years ago, the World Health Organisation discovered that chewing betel nuts was a cause of mouth cancer - and the Taiwanese government took the warning to heart. Up to 20,000 Taiwanese jobs depend on the crop and, say the hardened betel traders of Kaohsiung, it is up to the authorities to come up with a way of saving their livelihoods. One suggestion is to make the nut into “authentic Kaohsiung” soap to sell to Chinese tourists.

Facts and figures

Origin of name: From the Makatao language, translating as “bamboo forest”
Area: 154 sq km
Population: 1.5 million
Density: 9,862 people/sq km
Economy: $690 billion (Taiwanese GDP, 2007)
Exchange rate: £1 equals 62 Taiwan dollars
Visa regulations: British citizens can spend up to 30 days in Taiwan without a visa
Timezone: GMT +8 hours
Website: kcg.gov.tw/english Airlines offering connecting flights from London to Kaohsiung include KLM, Lufthansa, China Airlines and Air France

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