Unbridled growth in economic ties between Taiwan and mainland China is leading to increasing calls for the ROC government to cool down "mainland fever." The global craze for investing in mainland China has been running strong ever since early 1992, when the main land's paramount leader Deng Xiaoping (Teng Hsiao-ping) called for accelerated economic reform by actively soliciting foreign investment. His remarks, made during a well-publicized tour of southern China, were heard especially loudly in Taiwan.
The new policy was formally established in October 1992, during the 14th Communist Party Congress in Peking. The milestone resolution adopted a policy of establishing a "market economy under socialism" by allowing the market itself to determine resource allocation within the guidelines of socialism. This touched off intense investment activity. The mainland registered a dizzying growth rate of 12.8 percent in 1992, and reached 13.9 percent during the first half of 1993. This rocketing growth contrasted sharply with the recession plaguing most industrialized nations.
Foreign investors have been scrambling to enter the mainland market in order to tap into the huge potential demand of 1.2 billion people. In 1992 alone, mainland authorities approved 48,000 cases of foreign investment, with capital commitments totaling US$58.1 billion. Both the number and value of 1992 investment cases exceeded the cumulative amounts for the preceding thirteen years.
A large percentage of last year's in vestments came from Taiwan. Commitments for investment from local business people topped US$5.5 billion last year, while the amount actually invested totaled US$1 billion. These figures placed Taiwan second only to Hong Kong in the size of mainland investments. After adding the US$3.4 billion in investment commitments made by Taiwan investors through 1991, the cumulative total jumps to US$9 billion as of the end of last year. This figure comprises more than 10,200 investment cases from Taiwan.
Some economists have dubbed main land China not only the next engine for Asia's economic growth, but the driver for the world's economy. The attraction of the market was further augmented this summer, when the International Monetary Fund (IMF) released statistics ranking the mainland economy as the third largest in the world. Based on a new calculation method—which assesses the purchasing power of a country's local currency within the local market, then converts it to U.S. dollars—the report listed the mainland's GNP as trailing only after those of the United States and Japan. (The traditional calculation method is based strictly on exchange rates into U.S. dollars.) Under this new method, the mainland's GNP is US$1.7 trillion, more than four times the US$400 billion figured under the traditional method, and average per capita income is US$1,450, compared with US$370 under the traditional method.
The mainland investment craze has induced hectic trading across the Taiwan Straits. Much of this trade is in supplies of machinery equipment, components and parts, and raw materials from Taiwan to mainland factories. In the first four months of this year, while Taiwan's exports to the United States, Japan, and Europe declined, cross-straits trade jumped 25 percent, to US$2.6 billion. This consisted of exports of US$2.3 billion to the mainland and US$337 million in imports from the mainland.
In addition, according to Hong Kong government statistics, last year's cross straits trade using the colony as a steppingstone to the mainland grew 21 percent, to US$7.4 billion. As a result, Hong Kong has emerged as Taiwan's second largest foreign trade partner after the United States. Trade between Taiwan and Hong Kong topped US$17 billion in 1992, with an imbalance of US$13 billion in Taiwan's favor.
Hong Kong has become a critical intermediary for cross-straits economic links. More than three thousand Taiwan companies have set up their subsidiaries in the colony, mainly for conducting indirect investments in the mainland. Many Taiwan companies underreport the value of their exports to Hong Kong and deposit the difference of their forex earnings in the colony's financial institutions. The deposited money is then remitted to their mainland operations as working capital.
High voltage growth—The mainland economy grew by 13 percent last year; 14 percent during the first half of 1993. Here, workers assemble electronic components in a Shenzhen factory.
The pace of growth in cross-straits economic links shows little sign of slowing, although the effects of Peking's new austerity plan announced this July remain to be seen. (The program was initiated by Zhu Rongji 朱鎔基, former vice premier and new governor of the People's Bank of China.) In the first five months of 1993, mainland investments formally registered with the ROC Investment Commission of the Ministry of Economic Affairs (MOEA) soared 700 percent over the same period last year, to US$510 million. This exceeds the US$480 million in outward investments made to all other parts of the world combined.
In the past, mainland investments were confined mainly to small- and medium-sized enterprises serving export markets. Now the craze has spread to established firms, many of which are targeting the mainland's newly opened domestic market. This year, the share holders of ninety-six Taiwan-listed firms have granted their boards of directors the authority to proceed with mainland investment projects up to a specific capital ceiling. The combined ceiling for these companies tops US$1.43 billion. The textile industry heads the list with eighteen companies authorized to invest up to US$570 million in the mainland, followed by the food industry with twelve companies and an investment ceiling of US$300 million. President Enterprises Corp., Taiwan's largest food company and the biggest spender on the list, set its investment cap at US$200 million.
Plenty to cheer about for these workers at a Taiwan-owned factory on Hainan Island. From January to May of 1993, Taiwan's registered mainland investments soared 700 percent over the same period last year.
Economic links strengthened further in April during the historic talks between Koo Chen-fu (辜振甫), chairman of Taiwan's Straits Exchange Foundation (SEF), and Wang Daohan (汪道涵), chairman of the mainland's Association for Relations Across the Taiwan Straits (ARATS). (SEF and ARATS are the semi-official establishments responsible for cross-straits civil exchanges.) The Koo Wang talks outlined plans for an institutionalized channel for civil exchanges between the two sides. The parties signed two agreements, one for the authentication of legal documents and the other for handling registered mail. The meeting also led to agreements on cooperation in exploitation of energy and other resources, mutual visits of technicians and other professionals, and exchanges of industrial technologies. The most important agreement was the establishment of a regular communications channel allowing both parties to address the increasing disputes concerning the flow of people across the straits and to establish a legal framework for further development of civil exchanges.
Increasingly close cross-straits links have aroused growing concern among analysts. Critics fear that the massive mainland investments will cause a hollowing-out of the island's industrial base. They also point out that the economy is far more dependent upon main land markets than official statistics show.
Kao Chang (高長), acting director of the First Institute (which specializes in mainland affairs) at the Chung-Hua Institution for Economic Research, reports that in addition to Hong Kong's official statistics of US$6.3 billion in exports transshipped to the mainland in 1992, un recorded exports were valued at US$2.5 billion. Meanwhile, US$1 billion worth of Taiwan-made goods were purchased by Hong Kong business people, then resold to the mainland. And 1992 exports transshipped via Singapore, Japan, South Korea, Guam, and other intermediary places topped US$3 billion. All told, Taiwan's exports to the mainland reached nearly US$13 billion in 1992, or 14 percent of the island's total exports. With these additions, the mainland emerges as the is land's second largest overseas market; US$23.5 billion in exports headed for the United States last year, representing about 29 percent of total exports.
These close economic links with the mainland are affecting the island's financial stability. Due to the difficulty of obtaining loans from mainland banks, most Taiwan invested mainland operations rely on the island not only for initial investment capital, but also for expansion and operational funds. Lin Chung-hsiung (林鐘雄), chairman of E. Sun Bank and a professor of economics at National Taiwan University, estimates that almost 7 percent of lo cal bank loans made to Taiwan companies are used for mainland operations.
Hot property—Real estate projects such as this planned office bUilding in Xiamen are reeling in foreign investors. Can the banks keep up? Local lenders are watching their funds pour into the mainland.
Since these loans are not re-deposited into local banks (as loans for local use are), Taiwan banks have experienced a draining of funds in recent years; they are making more loans and receiving fewer deposits. This has strained the local credit supply, boosting interest rates and distorting the financial statistics on which the government has built its monetary policy.
Critics warn that Taiwan's economy could become overly dependent on the mainland, enabling Peking to use Taiwan business people as bargaining chips to pressure the ROC government to change its mainland policy. Lin Bih-jaw (林碧炤), director of the Institute of International Relations, National Chengchi University, cautions that there is a political motive be hind Peking's solicitation of Taiwan investors. He notes that the mainland is likely to use commercial benefits as leverage to solicit specific Taiwan investors as spokespersons, a tactic which has proved very successful in Hong Kong. In the past several years, mainland China officials have regularly used Hong Kong business people to speak for them during negotiations with the British government on the future of the colony and when pressing for continued MFN status with the United States.
Shirley Kuo (郭婉容), minister of state, has stressed in local press reports that reducing Taiwan's dependence on the Hong Kong and mainland markets will alleviate local economic fluctuations caused by changes in these economies. John Fei (費景漢), a member of Academia Sinica and professor of economics at Yale University, urges the government to slow the pace of liberalizing its mainland-related economic policy and adopt a wait-and-see attitude. He has stressed to local reporters that Peking's socialist economic reforms are still part of a new concept and their outcome is uncertain.
Hot property—Real estate projects such as this planned office bUilding in Xiamen are reeling in foreign investors. Can the banks keep up? Local lenders are watching their funds pour into the mainland.
Observers note that the mainland's economic reforms will inevitably encounter strong resistance from those entrenched in the existing system. Caught up in the investment fever, both state and local government enterprises on the mainland have been eagerly undertaking various investment projects. Many of these projects, however, were decided hastily and without necessary consideration of market conditions and are thus expected to fail.
Another problem is that mainland fever has been fueled by the unbridled growth in credit extensions by mainland banks. These loans have nurtured rampant speculation in stocks and real estate. As a result, by the end of the second quarter of 1993, many mainland banks had used up their loan quotas for the entire year. The only funds available for new loans were coming from repayments on outstanding loans. This shortage of available funds has deprived the agricultural sector and many key national development projects of needed capital.
Moreover, many mainland banks have set up affiliated finance or investment companies to provide loans or even to engage in direct investments, thereby further swelling the credit flood. Consequently, the mainland's money supply is mushrooming at an annual rate of 30 to 45 percent, depending on which definition of money supply is used.
The combination of a soaring money supply coupled with the mainland's strained infrastructure system and its shortage of raw materials has unleashed the specter of inflation. In the first half of 1993, mainland consumer prices jumped 12.5 percent over the same period last year, and 17.4 percent in the large cities. The financial chaos in the mainland resulted in the ouster of Li Guixian (李貴鮮), former governor of the People's Bank of China, in July. Vice Premier Zhu Rongji took over Li's responsibilities and laid out a sixteen-point package of austerity measures, which has sent shock waves throughout the mainland economy.
Finally, analysts expect the mainland's economic reforms to encounter growing resistance from state-run enterprises, which still account for half of its GNP. Many of these businesses are expected to suffer in the face of competition from imported goods, the development of the private economic sector, and the penetration of the mainland market by foreign invested firms. The result could be large-scale unemployment.
The ROC government has already made some moves toward regulating the pace of cross straits economic development. The cabinet adopted an economic stimulus package in early July that specifies a government plan for organizing Taiwan investors in the mainland. It also sets up an index for monitoring cross-straits economic links, and to provide a warning if the ties develop to a dangerous level. Already, government agencies have advised some companies to slow down their main land investment projects.
This year, all Taiwan investors have been required to register their mainland projects with the government. By the June 3 deadline, 9,100 Taiwan investors had done so. Their combined capital investments totaled US$3 billion. Another controlling regulation is that mainland investments must be conducted via a third country. While some investment projects are automatically approved by the ROC government, others are either banned or must be approved on a case-by-case basis by the MOEA' S Investment Commission. A major: criterion is whether the companies have made substantial investments in R&D and in upgrading local operations.
But despite the long list of possible dangers for Taiwan, the ROC government is facing equally strong pressure to loosen restrictions on economic ties with the mainland. In fact, advocates of cross straits economic links contend that the trend is irreversible. Yeh Wan-an (葉萬安), former vice chairman of the Council for Economic Planning and Development, the cabinet's economic think tank, notes that at a time when countries throughout the world are scrambling to enter the mainland market, it would be a great pity for Taiwan, which enjoys the advantage of ethnic and language identity, to abandon the opportunity.
Yu Tzong-shian (于宗先), president of the Chung-Hua Institution for Economic Research, says that industries that have lost their comparative advantage will inevitably decline if they remain on the island. The danger of Taiwan's industrial hollowing-out, says Yu, has been caused by the island's failure to develop more technology-intensive industries, not by the moving of Taiwan investors to the mainland. Lu Jung-hai (陸榮海), a member of the Fair Trade Commission of the Executive Yuan, believes that the acquisition of a prominent status by Taiwan investors in the mainland market will give the government the best political and economic tool for developing healthy cross straits relations.
In general, the government is adopting a positive stance toward the development of cross-straits economic links. P.K. Chiang (江丙坤), minister of economic affairs, says that the government's main land-related economic policy is based on guidance rather than restrictions. Another ranking MOEA official points out that attempts to control mainland fever are impractical and ineffectual, and they often prompt Taiwan investors to hide their mainland projects.
Vincent Siew (蕭萬長), chairman of the CEPD, has stressed to the local media that the current problem confronting Taiwan's economy is the deterioration of its own investment environment, rather than the growth of mainland investments. Without the mainland market, Siew says, local business people would simply be in vesting more in Southeast Asia.
The government's positive stance to ward mainland links is reflected in the cabinet's economic stimulus package, which affirms adherence to market principles in the handling of cross-straits economic links, except on issues involving major political considerations. Under these principles, the government plans to exempt commercial activities from the requirement of prior approval, except for investment in manufacturing, trade, or technical cooperation. In addition, the government will expand the import of semi-finished products from the mainland (to help local manufacturers reduce production costs), and promote cross-straits technological exchanges, which would include bringing in industrial technological personnel from the mainland.
But many business people are seeking further loosening of regulations. In May, Wang Yu-yun (王玉雲), chairman of Hua Eng Wire & Cable, openly urged the government to abandon the "three nos" policy toward the mainland (no negotiation, no contact, and no compromise on an official basis), explaining that it runs counter to Taiwan's economic development. Cross-straits economic exchange, Wang said, is an irreversible trend, and if the government continues to give politics priority in its mainland policy, Taiwan's economy will eventually be surpassed by the mainland. Wang made the remarks at a shareholders' meeting during which he also announced company plans to invest US$30 million to build steel and cable plants on the main land.
Wang's remarks, and his planned mainland projects, caused widespread concern locally because of his prominent status in Taiwan's business and political arenas. The head of a powerful conglomerate and an influential political faction in southern Taiwan, Wang is also former mayor of Kaohsiung, vice chairman of the MOEA Commission of National Corporations, and chairman of the government-run Taiwan Fertilizer Co. He is also a national policy adviser to the president.
The government's goal of developing Taiwan into a regional operations center for multinationals is another source of pressure to relax its mainland policy. The island's ability to serve as a spring board to the mainland market is its chief selling point, and Taiwan can only be come such a hub if restrictions on cross straits exchanges are loosened.
But there is an overriding reason the government is likely to maintain its regulations concerning mainland investment: 'national security. Dispelling concerns about the safety of the island will require a more pragmatic attitude on the part of Peking in its political policy concerning Taiwan. The ROC government has specified the conditions under which it would relax its mainland-related economic policies and upgrade cross-straits economic links: recognition by Peking that the ROC is an independent entity, renunciation of the use of force against Taiwan, and allowing the ROC sufficient room to maneuver in the international arena. Until these goals are met, the ROC will most likely continue wading through a sea of varying and conflicting currents by maintaining its policy of developing cross straits economic links at a gradual and controlled pace while also keeping existing regulations in place. •