(This is an excerpt from an article entitled "Softly, Softly" that was originally published in The Far Eastern Economic Review on October 9, 1997.) China and Taiwan are Asia's foremost odd couple: Their political leaders fling barbs at each other as often as they express their willingness to come to the negotiating table. Yet despite the rivalry, Taiwanese businessmen and local governments on the Chinese mainland are seeking a closer working relationship between the two sides which goes beyond politics. Meanwhile, the Taiwan government's attitude toward Taiwanese investments in China continues to be ambivalent. Worrying about the effects of HOng Kong's handover to Chinese rule, the Ministry of Economic Affairs' Investment Commission met with the Chinese National Federation of Industries, the leading industry lobby, to announce a stringent set of new rules in evaluating applications for investments in China. The main criterion for investment approval, the commission said, would be a project's possible contribution to Taiwan's economic competitiveness. That was not all. The commission reiterated a ban on capital-intensive infrastructure projects such as dams, power plants, airports, highways and ports in China. That effectively scuttled a plan by Taiwan's biggest business group, the Formosa Plastics Group, to put up a $3.2 billion thermal-power complex in Zhangzhou, Fujian province. The government agency also imposed a cap on mainland investments at NT$60 million ($2.1 million) for individuals as well as small and medium-sized businesses. The island's officials adjusted policy yet again when Economic Affairs Minister Wang Chih-kang said his office would take up the study of direct cross-strait trade links following the opening of transshipment services earlier this year. According to the existing cross-strait trade system, goods from either China or Taiwan must be shipped to and unloaded at a third port, say Hong Kong, Before they are sent to their final destination across the Taiwan Strait. The government also commented that high-level dialogue is inevitable but must take place under conditions of "equality and dignity." Observers expect that some form of talks could re-open next spring, nearly three years after they were suspended by Beijing following President Lee Teng-hui's visit to the United States in June 1995. Despite the absence of official contacts, cross-strait trade continues to grow, making up about ten percent of Taiwan's total foreign trade. From January to June this year, Taiwan's exports to China were worth $9.53 billion, up by six percent from a year earlier and accounting for 16 percent of the island's total exports. Only Japan and the US exported more to China. The Straits Exchange Foundation estimates that Taiwanese investments in China dropped ten percent in the first half of this year, though official approvals by the Investment Commission dropped only two percent. In what seems a counteroffensive to lure yet more Taiwanese money, the Chinese government has instituted several investment reforms. On August 1, it promulgated the Joint Venture Enterprise Law which allows Chinese nationals to form joint ventures with foreigners. This right was formerly reserved only for Chinese enterprises. The mainland authorities have especially targeted investment projects worth more than $270 million in electronics, vehicle manufacture, chemical processing, finance and infrastructure. Taiwan's Economic Affairs Ministry, however, has imposed a ban on investments in the last two categories and restricts some other types of ventures, especially large-scale projects. Many Taiwanese companies, however, do not need much coaxing to throw money into China as high labor and land costs and shrinking growth opportunities at home force them to look outwards. Some abide by the government's investment rules, waiting for approval from both the Securities and Futures Commission as well as the Investment Commission before going ahead with new projects. Others ignore the rules. One of the biggest Taiwanese conglomerates, the Far Eastern Group, waited for several months to get the official nod for a $15 million investment in a ready-mixed concrete plant and silo in Shanghai and another cement facility in Jiangxi. It will make the investment through a subsidiary, Asia Cement. The Shanghai plant will have an annual output of about 1.4 million tons, a fifth of its total production in Taiwan. Compared with China's demand for cement of 55 million tons a year, it is a modest project. "You can't ignore China with its 1.2 billion people," says Douglas Tong Hsu, Far Eastern's chief operating officer. "I'm optimistic about that market, even if the group is bound by a strict government approval process." Other investors use circuitous routes for their China projects, often going through independent offshore subsidiaries. For instance, Kwong Fong Textile, one of the top five Taiwanese investors in the mainland, accesses China through a Hong Kong subsidiary, Great China Holdings Group. A Kwong Fong source said that Great China HOldings has put $26 million into upmarket property development projects in Shanghai and Beijing. The Hong Kong subsidiary says it also plans to throw money into a power plant in Fujian, to be built with Trans Asia Power of Canada, as well as in a port facility in Hainan. Some analysts say that the Chinese government must do more to keep Taiwanese investors engaged. Some Taiwanese companies, particularly the small and medium-sized ones, have found the mainland investment climate unfriendly, local officials too venal and defaults by customers frequent. Some of these companies fold every year. "It's a drastic change in terms of market size and business habits. In the past couple of years, Taiwanese businessmen have suffered from an economic squeeze," says Chung Chin, a research fellow at the Chunghwa Institute for Economic Research. Taiwanese analysts and investors typically single out equal treatment for both foreign and Chinese companies as a crucial factor. One big Taiwanese shoe maker with a factory in Zhuhai gripes about excess taxes to which foreign companies are subjected, including one for national defense. The tariff on raw materials for shoes is a high 33 per cent, for instance. Economist Chung says the extension of national treatment to cover foreign firms would be a gradual process that China must be willing to accept if it wants admission into the free traders' club World Trade Organization. The local governments of the economic hothouses of Guangdong, Shanghai and Suzhou have been aggressive in pursuing such reforms, with promises of tax incentives, favorable land leases and investment protection. Yet Taiwanese business people say that such programs are still not formalized. In the meantime, Taiwanese companies that see their future growth fuelled by expansion on the mainland continue to leap into a slew of businesses there. Small and medium-sized companies that are beyond the government's purview are in a particularly good position to invest. They are less constrained, for instance, by Taiwan's investment rules.
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(This is an excerpt from an article entitled "Softly, Softly" that was originally published in The Far Eastern Economic Review on October 9, 1997.) China and Taiwan are Asia's foremost odd couple: Their political leaders fling barbs at each other as often as they express their willingness to come to the negotiating table. Yet despite the rivalry, Taiwanese businessmen and local governments on the Chinese mainland are seeking a closer working relationship between the two sides which goes beyond politics. Meanwhile, the Taiwan government's attitude toward Taiwanese investments in China continues to be ambivalent. Worrying about the effects of HOng Kong's handover to Chinese rule, the Ministry of Economic Affairs' Investment Commission met with the Chinese National Federation of Industries, the leading industry lobby, to announce a stringent set of new rules in evaluating applications for investments in China. The main criterion for investment approval, the commission said, would be a project's possible contribution to Taiwan's economic competitiveness. That was not all. The commission reiterated a ban on capital-intensive infrastructure projects such as dams, power plants, airports, highways and ports in China. That effectively scuttled a plan by Taiwan's biggest business group, the Formosa Plastics Group, to put up a $3.2 billion thermal-power complex in Zhangzhou, Fujian province. The government agency also imposed a cap on mainland investments at NT$60 million ($2.1 million) for individuals as well as small and medium-sized businesses. The island's officials adjusted policy yet again when Economic Affairs Minister Wang Chih-kang said his office would take up the study of direct cross-strait trade links following the opening of transshipment services earlier this year. According to the existing cross-strait trade system, goods from either China or Taiwan must be shipped to and unloaded at a third port, say Hong Kong, Before they are sent to their final destination across the Taiwan Strait. The government also commented that high-level dialogue is inevitable but must take place under conditions of "equality and dignity." Observers expect that some form of talks could re-open next spring, nearly three years after they were suspended by Beijing following President Lee Teng-hui's visit to the United States in June 1995. Despite the absence of official contacts, cross-strait trade continues to grow, making up about ten percent of Taiwan's total foreign trade. From January to June this year, Taiwan's exports to China were worth $9.53 billion, up by six percent from a year earlier and accounting for 16 percent of the island's total exports. Only Japan and the US exported more to China. The Straits Exchange Foundation estimates that Taiwanese investments in China dropped ten percent in the first half of this year, though official approvals by the Investment Commission dropped only two percent. In what seems a counteroffensive to lure yet more Taiwanese money, the Chinese government has instituted several investment reforms. On August 1, it promulgated the Joint Venture Enterprise Law which allows Chinese nationals to form joint ventures with foreigners. This right was formerly reserved only for Chinese enterprises. The mainland authorities have especially targeted investment projects worth more than $270 million in electronics, vehicle manufacture, chemical processing, finance and infrastructure. Taiwan's Economic Affairs Ministry, however, has imposed a ban on investments in the last two categories and restricts some other types of ventures, especially large-scale projects. Many Taiwanese companies, however, do not need much coaxing to throw money into China as high labor and land costs and shrinking growth opportunities at home force them to look outwards. Some abide by the government's investment rules, waiting for approval from both the Securities and Futures Commission as well as the Investment Commission before going ahead with new projects. Others ignore the rules. One of the biggest Taiwanese conglomerates, the Far Eastern Group, waited for several months to get the official nod for a $15 million investment in a ready-mixed concrete plant and silo in Shanghai and another cement facility in Jiangxi. It will make the investment through a subsidiary, Asia Cement. The Shanghai plant will have an annual output of about 1.4 million tons, a fifth of its total production in Taiwan. Compared with China's demand for cement of 55 million tons a year, it is a modest project. "You can't ignore China with its 1.2 billion people," says Douglas Tong Hsu, Far Eastern's chief operating officer. "I'm optimistic about that market, even if the group is bound by a strict government approval process." Other investors use circuitous routes for their China projects, often going through independent offshore subsidiaries. For instance, Kwong Fong Textile, one of the top five Taiwanese investors in the mainland, accesses China through a Hong Kong subsidiary, Great China Holdings Group. A Kwong Fong source said that Great China HOldings has put $26 million into upmarket property development projects in Shanghai and Beijing. The Hong Kong subsidiary says it also plans to throw money into a power plant in Fujian, to be built with Trans Asia Power of Canada, as well as in a port facility in Hainan. Some analysts say that the Chinese government must do more to keep Taiwanese investors engaged. Some Taiwanese companies, particularly the small and medium-sized ones, have found the mainland investment climate unfriendly, local officials too venal and defaults by customers frequent. Some of these companies fold every year. "It's a drastic change in terms of market size and business habits. In the past couple of years, Taiwanese businessmen have suffered from an economic squeeze," says Chung Chin, a research fellow at the Chunghwa Institute for Economic Research. Taiwanese analysts and investors typically single out equal treatment for both foreign and Chinese companies as a crucial factor. One big Taiwanese shoe maker with a factory in Zhuhai gripes about excess taxes to which foreign companies are subjected, including one for national defense. The tariff on raw materials for shoes is a high 33 per cent, for instance. Economist Chung says the extension of national treatment to cover foreign firms would be a gradual process that China must be willing to accept if it wants admission into the free traders' club World Trade Organization. The local governments of the economic hothouses of Guangdong, Shanghai and Suzhou have been aggressive in pursuing such reforms, with promises of tax incentives, favorable land leases and investment protection. Yet Taiwanese business people say that such programs are still not formalized. In the meantime, Taiwanese companies that see their future growth fuelled by expansion on the mainland continue to leap into a slew of businesses there. Small and medium-sized companies that are beyond the government's purview are in a particularly good position to invest. They are less constrained, for instance, by Taiwan's investment rules.