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Gone Is The Go Between (Int'l Edition)


Cover Story

GONE IS THE GO-BETWEEN (int'l edition)

Taiwan's trade connections with China will survive, but without Hong Kong as a vital buffer

Cargo ships crowd the piers in Keelung, Taiwan's second-largest port, while beyond the harbor's mouth, waiting vessels float against the horizon. A pair of cranes are busy loading containers of chemicals, machinery, shoe materials, and detergents onto Ming Peace, a ship of Yang Ming Marine Transport Co. bound for Hong Kong. The goods' final destination, though, is Guangdong.

For Keelung and for Taiwan's entire economy, the Hong Kong connection is crucial. Taipei's long-standing ban on direct Taiwan-China trade has made the colony the staging area for huge reexports of Taiwanese goods to the mainland, totaling $21 billion last year (chart). That role also makes Hong Kong a potential choke point for Taiwan's vital economic ties with China, its No.3 trade partner after the U.S. and Japan. "If we couldn't use Hong Kong to export to China, our economy would definitely have a problem," says Sumi Chang, chairman of San Fu Chemical Co., which has several plants in China.

HIGH STAKES. A cutoff of trade, or even an interruption, is unlikely: China benefits from the investments, totaling $13 billion, by Taiwanese companies in factories on the mainland (table) and from the trade flow including materials and components for the Taiwanese plants. But the handover will leave Taiwan's political status more exposed than ever. After Hong Kong's return to the fold, Taiwan, in Beijing's view, will be the only part of China still unredeemed. That will heighten the risk, after July 1, that conflicts may erupt at any time over the basic tension between Taipei's claim to autonomy and Beijing's efforts to recover Taiwan. Up to now, Hong Kong has served as a buffer between them. But once the colony is under Beijing's thumb, it will become China's main political weapon against Taiwan. "Beijing's strategy is to use Hong Kong to publicize the model of one country, two systems," says Yeh Ming-teh, a political scientist at Taiwan's National Chengchi University.

A smooth handover of Hong Kong would give more credibility to that formula. But China also will use Hong Kong's new status to chip away at Taiwan's symbolic claims to political independence. A flock of agencies in Hong Kong that display Taiwan's sunburst Republic of China flag will probably have to leave Hong Kong. The most important agency is Chung Hwa Travel Service, which issues visas and also functions as a de facto Taiwanese consulate. Beijing will have to allow a visa office under some guise, but the expected curbs on its operation will set the tone for relations with Taiwan. "The future of Chung Hwa will be the most important issue for Taipei," says Yeh. "It will be an indicator."

Transportation is another. Taiwan and Hong Kong agreed last summer to allow air flights to continue, but the sides only worked out a compromise shipping accord on May 24 after earlier talks on the issue broke down. The hang-up was what flags Hong Kong and Taiwanese ships would fly when they enter each other's harbors. The "temporary" compromise: Taiwan-registered ships will fly no flag when they enter Victoria harbor, while Hong Kong ships will sail into Taiwan ports displaying the bauhinia flower--the territory's flag after the handover. Both sides had a powerful incentive to settle the issue to avoid the high cost of a trade cutoff. But the political stakes also are high: Questions such as ships' flags may set precedents for future negotiations over bigger issues, such as direct shipping between Taiwan and the mainland. "China wants every arrangement to be within the one-China framework, to make Taiwan an internal issue," says Chung Chin, a research fellow at Taipei's Chung Hwa Institution for Economic Research. Taiwan passed a law, based on Hong Kong's new status as a "special administrative region," to enable it to continue to pretend that Hong Kong is still separate from China.

For Beijing, the underlying issue in all links with Taiwan is eventual reunification. To achieve that goal, and discourage Taiwanese steps toward greater independence, Beijing could try to exert pressure--from economic blackmail to diplomatic warfare or military threats, such as last year's missile tests in the Taiwan Strait.

Still, most Taiwanese business executives are surprisingly unworried about such scenarios. Among the least concerned are those with big investments on the mainland. Several Taiwanese companies already have listed their China ventures on the Hong Kong stock market, including shoe manufacturer Pao Cheng, noodle company Ting Yi, and timber company Ta Fu. "They aren't nervous," says Victoria Liu of Taiwan's Core Pacific Securities, which has helped several Taiwan companies go public in Hong Kong. "They already put their money in China," she adds. "Why should they be afraid of Hong Kong returning to mainland China?"

SAFE HAVENS. Walsin Lihwa Corp., a diversified cable and wire manufacturer that is one of Taiwan's largest business groups, is also one of the biggest investors in the mainland, with eight cable factories worth a total of $100 million. Although the company ships raw materials through Hong Kong to its China plants, chairman Y.L. Chiao dismisses worries about the transition. "Hong Kong is not very important for us," he says. "I'm more interested in knowing whether we'll be able to have direct shipping to China than how Hong Kong is going to come along."

Such attitudes are a far cry from the anxiety that roiled Taiwan's markets during China's missile tests just 15 months ago. Taiwanese companies' confidence is helped by the fact that few have large stakes in Hong Kong real estate or manufacturing. Many already have moved holding companies for their mainland businesses from Hong Kong to havens such as Singapore and the Cayman Islands. Others, which use Hong Kong to bank profits from their China investments, are moving their cash, too. One reason: Closer scrutiny of Hong Kong banking records by mainland authorities might reveal that some Taiwanese companies overestimate the cost of raw materials for their China plants to keep profits outside of China. "There are many financial operations they would not want the mainland regime to fully control," says Ma Kai, a research fellow at Chung Hwa Institution. "Hong Kong's role as a financial center could be hurt quite seriously."

One Taipei businessman with investments in Hong Kong is Nelson Chang, president of Chia Hsin Cement Corp. He is keeping some real estate holdings there but is moving some financial assets offshore before the handover. "You have to have a contingency plan," he says. "It's the only prudent thing to do." Chia Hsin has about $20 million to $30 million of investments in the mainland, using Singapore as the base for its holding company. Eventually, though, Chang says, he would like to list his China operations on stock markets in both Hong Kong and Shanghai.

Walsin's Chiao intends to "watch for a few months," but he, too, expects to list his China ventures in Hong Kong eventually. "I am optimistic," he says. What Chiao and others are hoping is that complex cross-strait politics won't spoil the economic banquet.By Jonathan Moore in TaipeiReturn to top


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