The Growing Importance of Cross-Strait Linkages

Mainland China’s high degree of openness, especially in comparison to Japan, was discussed in Chapter 2. As with the rapid growth spurts enjoyed by other Asian economies, including Hong Kong and Taiwan in the 1970s and 1980s, openness has allowed mainland China to capitalize on high- quality human capital while acquiring advanced technology from abroad.^[152] China is, in fact, already ranked among the top twenty-five countries in the world in terms both of its overall globalization level and its level of “economic globalization” - as reflected in the importance of trade, foreign direct investment, portfolio investment, and income flows (see Lockwood and Redoano, 2005).^[153] An important element of mainland China’s increased globalization has been growing economic ties with Taiwan, helped, of course, by geographical proximity as well as common heritage and language.

The separate political systems of mainland China and Taiwan date, of course, from the exodus of the defeated Nationalists to Taiwan at the end of the 1940s (Chapter 6). After the Nationalists established themselves on the island, Taiwan and mainland China followed entirely separate paths. Taiwan adopted an export promotion strategy amid close ties with the West while mainland China largely withdrew from world markets as discussed in Chapter 1. Even after US President Richard Nixon’s visit to China in 1972 marked the beginning of a thawing in US-mainland China relations, there was, at first, still no rapprochement between the People’s Republic and Taiwan. Indeed, Taiwanese firms were expressly forbidden any involvement on the mainland under Taiwan President Chiang Ching-kuo’s 1979 policy of “no contact, no negotiation, no compromise.”^[154] Even so, mainland China began officially encouraging links with Taiwan, including the adoption of a zero-tariff policy on imports from Taiwan in 1980 (Tung, 2004, p.

Estimated total trade between mainland China and Taiwan rose from just $US 1.1 billion in 1985 to $US 88.1 billion in 2006 - with the 2006 figures comprising $US 63.3 billion flowing from Taiwan to mainland China and $US 24.8 billion in exports from mainland China to Taiwan (see Table 9.1). Trade flows accelerated considerably after Taiwan, like mainland China, joined the WTO around the end of 2001 - with Taiwan’s entry date of January 1, 2002 close on the heels of mainland China’s own December 11, 2001 entry. Indeed, during the five-year period from 2001-2006, cross­strait trade volumes increased by over 194%. In 2006, cross-strait trade accounted for just over 20.65% of Taiwan’s total foreign trade and for 5% of mainland China’s total foreign trade (Table 9.2). Taiwan’s overall positive

Table 9.1. The Level of Cross-Strait Trade Between Taiwan and Mainland China

Notes: Figures are in $US millions and are based on estimates by Taiwan's Mainland Affairs Council that include transit trade between Taiwan and Mainland China via Hong Kong.

Source: Mainland Affairs Council.

trade balance in recent years has, in fact, been very much dependent upon its surpluses with mainland China. In 2006, for example, Table 9.2 shows that Taiwan's estimated trade surplus with mainland China via Hong Kong was $US 38.5 billion while its overall surplus was just $US 21.3 billion - implying a deficit of $17.2 billion with the rest of the world. Indeed, despite ongoing governmental limitations, and continued disallowance of direct trade links, mainland China became Taiwan's second largest export mar­ket by 1993 and has been its top export market since 2002 (Tung, 2004). The importance of this relationship to mainland China is reflected in the fact that Taiwan became China's fourth largest trading partner over the 1990s.

Table 9.2. Cross-Strait Trade Relative to Taiwan and Mainland China’s

Overall World Trade

Notes: Figures in the first two columns are in $US millions and the third and fourth columns are in percentages.

Source: Mainland Affairs Council.

WTO membership has been accompanied by increased liberalization of mainland China-Taiwan trade.^[155] Should this eventually allow direct trade and transport ties to replace indirect shipping via Hong Kong or, to some extent, Japan, the reduction in shipping costs would significantly add to the attractiveness of cross-strait trade. Transshipping goods via a third area may have added as much as $US 1.51 billion to annual cross-strait transportation costs in 2001, or just over 5% of the total trade value (Lardy, 2002, p. 166).

Table 9.3. Taiwan Remittances to and from Mainland China, 2002-2006

Notes: Figures in the first and third columns are in $US millions and the second and fourth columns are in percentages. Remittance data were expanded in September 2006 to include the Offshore Banking Unit as well as the Designated Foreign Exchange Bank of Taiwan. Complete series are available only from June 2001.

Source: Mainland Affairs Council.

In 2006, 28.27% of Taiwan’s total exports and 12.23% of Taiwan’s total imports were attributed to mainland China. If trade with Hong Kong is added to these figures, we then have 38.87% of Taiwan’s total exports and 13.55% ofTaiwan’s total imports.^[156] Mainland China itself accounted for over 80% of Taiwan’s total foreign investment in 2006, with a cumulative total of $US 56.98 billion in approved investments in mainland China from 1991 through March 2007. During the first three months of 2007 alone, 258 cases totaling $US 2.08 billion were approved, representing an 8.4% increase year- on-year. The dramatic rise in the flows of funds between mainland China and Taiwan in recent years is shown in Table 9.3. Remittances from Taiwan to mainland China exceeded $US 128 billion in 2006, up 31% from 2005 and up almost tenfold since 2002. Remittances from mainland China to Taiwan have also soared, reaching over $US 72 billion in 2006, up 55% from 2004 and up nearly fifteenfold since 2002.

Official Chinese statistics show Taiwan accounting for 12.74% of all foreign direct investment (FDI) projects in mainland China over the 1979­1999 period, second only to Hong Kong. Meanwhile Taiwan’s 7.76% share in the realized value of mainland China FDI ranked fourth, just behind the United States and Japan (Zhang, 2005).^[157] Taiwan’s official share of realized FDI was 6.25% over the January 1979-March 2007 period as a whole but

Table 9.4. Mainland ChinaFDI Contributionsfrom Greater China Compared, 2002-2007

Realized Foreign Direct Investment

March 2007

Notes: Figures are in $US millions with the corresponding percentage shares given in parentheses. Source: Mainland Affairs Council.

The British Virgin Islands became mainland China’s second most impor­tant reported source of realized FDI over the January 1979-March 2007 period (after Hong Kong and Macau). Its share of total realized FDI reached 16.19% in 2006, with total realized investment up 67% in just two years - rising from $US 6.73 billion in 2004 to $US 11.25 billion in 2006 (see Table 9.4). Although we cannot be sure just how much of this accelerating British Virgin Islands activity reflects funds channeled from Taiwan, the overall increases in the British Virgin Islands’ share of realized FDI certainly far outweigh the declines observed in the official figures for direct FDI into mainland China from Taiwan since the early 2000s. Moreover, the decline in Taiwan’s reported share of total mainland China FDI to below 5% after 2004 can be compared with estimates of a “true share” in the 20.0 to 22.5% range (see Cooke, 2006, p. 5).

Taiwan’s FDI in China, like that of the largest contributor, Hong Kong, remains heavily export-orientated. Mainland China’s pool of cheap labor, coupled with the incentives offered to FDI by the People’s Republic, have been key factors fueling the inflow of funds from Taiwan.^[158] Taiwanese FDI has been further boosted by the common heritage of mainland China and Taiwan and the short distance between them (cf. Gao, 2005). The risk of political factors disrupting economic ties has remained an omnipresent concern, however, with Taiwanese investors almost certainly having more to fear than other foreign investors in mainland China. This fact may help explain why the average size of Taiwanese investments in mainland China has tended to be much smaller than average, typically only half the size of the average Japanese investment, for example (Hsiao and Hsiao, 2004). Another factor in these smaller-sized investments is almost certainly the past Taiwan government policy of prohibiting mainland China investments over $US 50 million, however, while allowing investments under $US 30 million to proceed subject only to mainland government approval (Sutter, 2002, pp. 525-526). The blanket $50 million cap on individual investments was lifted in August 2001, at which time the cap on total investment in China by Taiwan-listed firms was also raised (Asia Pacific Bulletin, 2001).

In spite of the gradually eased restrictions over the years, in 2007 Taiwan’s government still imposed an overall cap of 20% - for Taiwanese companies with total capitalization of $US 300 million or more - on the share of the firm’s total business that could be conducted on the mainland. Democratic Progressive Party Legislator Hong Chi-chang urged that the cap be raised to 40%,^[159] arguing that, with Taiwanese firms already circumventing the current rules by investing via third areas (as discussed earlier), a higher cap would at least allow them to legally reinvest some of their profits in Taiwan (see Huang, 2007, p. 8). One way to skirt the government-imposed cap has been to list separately in Hong Kong and thereby raise capital to support separate business operations there. As Cooke (2006, p. 6) puts it:

Taiwanese companies are essentially voting with their feet in favor of the long­term prospects of the mainland economy and against the economic policies of the Taiwanese government.

Such a strategy could involve listing in mainland China as well as Hong Kong. Whereas approximately forty Taiwanese companies were listed on Hong Kong stock exchange in early 2007, the strength of mainland China’s stock markets (Chapter 8) appeared to be fueling interest in bypassing Hong Kong to list directly on the mainland. Although only five Taiwanese companies had issued Shanghai or Shenzhen “A” shares at the beginning of 2007, this number was expected to double by the end of the year - and perhaps even double again in 2008 (Hille, 2007, p. 22).

In the following sections, we turn to the question of whether the grow­ing trade and FDI links between mainland China and Taiwan may be reflected in overall co-movement between the two economies. If the main­land China and Taiwan economies have become more closely linked, as the preceding discussion would suggest, we would expect this to be asso­ciated with co-movement of such key variables as output, money growth, inflation, and share price indices. In examining the possible linking of these broader macroeconomic variables over the post-1994 period, we hope to shed some light on whether the idea of a unified “Greater China” region - including Taiwan as well as mainland China and Hong Kong - indeed seems to be emerging economically in spite of continued political impediments.^[160]