China-Taiwan Rapprochement

The Political Economy of Cross-Straits Relations

Min-Hua Chiang

• Publisher: Routledge
• Year: 2015
• eBook ISBN: 9781317427933
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: International Relations
• Index: Politics & International Relations

This book examines how since about 2008 the economy of Taiwan has become ever more deeply integrated into the economy of China. It goes beyond a consideration of trade and investment flows, and discusses also the large population flows, the growing integration of the two financial systems and the nature of the deep economic integration at the industry and firm level. It considers the impact of growing economic integration on society and politics, assesses how China-Taiwan economic integration is affecting the East Asian region more widely, and explores the implications for international relations, including the United States dominance in the region. Overall, the book presents a comprehensive analysis of all the issues.

Part I
Integration in trade and investment

1 Taiwan’s investment in China

Push and pull

FDI has played a significant role in developing China’s economy since the end of the 1970s. In terms of industrial production, export volume and formation of domestic capital investment, foreign-invested enterprises contributed more compared to the average level of domestic firms in China. Taiwan was among one of the most important FDI sources in China. In fact, attracting investors from Taiwan was one of the main focuses in China’s FDI promotion policy in the beginning of its economic opening up. Different from China’s active promotion of investment from Taiwan, Taiwan’s economic policy towards mainland China was mainly based on Chiang Ching-kuo’s “three-no” policy–no contact, no negotiation and no compromise–with the communist regime in China. The trade with and investment in China was banned by Taiwan government at that time. Since the second half of the 1980s, however, the KMT government came to realize that the three-no policy might not be an effective way to conduct the economic relationship with the People’s Republic of China (PRC). The tremendously uncontrollable investment in China pushed the Taiwan government’s gradual relaxation of its outward investment rules on the mainland. In addition to China’s FDI promotional policy, America’s market opening up for Chinese exports, less expansive Chinese labour force, geographic proximity, cultural and language similarity all made China more attractive than other Southeast Asian nations for Taiwanese investors.

This chapter examines the evolution of Taiwan’s investment in China and the investment policy changes from the two governments across the Strait. It consists of three sections. First, China’s FDI promotion policy on attracting Taiwanese investment is reviewed. China’s encouragement for inward investment from Taiwan had not only facilitated its economic development but also set a foundation for the subsequent cross-strait economic integration. Beyond China’s policy promotion, the global environment mattered as well. The US opening up of its market to Chinese goods after the Sino–US reconciliation at the end of the 1970s is an important factor that further pushed export-oriented Taiwanese companies to invest in China. Second, Taiwan’s mainland China investment policy is evaluated. One of the most important reasons for Taiwan’s ineffective mainland investment policy was the divergent interests between the government and the entrepreneurs. The political hostility between the two governments restrained Taiwan to relax its rules. However, the Taiwanese entrepreneurs only eyed the business profitability. As such, even though there were some government’s limits on the outward investment in China, Taiwan’s entrepreneurs still made “illegal investments” via their holding companies. Indeed, these “illegal investments” were a manifestation of Taiwan’s loss of the comparative advantage for certain products on the international market and the need for domestic industrial upgrading on the island. Finally, Taiwan’s investment shift from small and medium enterprises (SMEs) in labour-intensive sectors to large enterprise in information and communication technology (ICT) sectors is examined. Both China’s FDI selection policy towards more technology-oriented manufacturing and Taiwan’s economic structural changes from manufacturing electronic goods to ICT production are reasons behind Taiwan’s investment concentration in China’s ICT sectors in recent years.

Push factors: China’s FDI promotion policy and Sino–US reconciliation

Since 1979, China began to set out a series of preferential policies for foreign investors aimed at exports. In 1980, the special economic zones (SEZs) were created in four cities: Shengzhen, Zhuhai, Shantou (in the province of Guangdong) and Xiamen (in the province of Fujian). The SEZs were designed to encourage FDI in order to bring job opportunities, technical knowledge and tax revenues to China. The proximity of the SEZs to Hong Kong, Macao and Taiwan in terms of language, geographic location and culture showed that initially the PRC’s economic-opening-up strategy was designed to rely on the capital inflow from these three economies. Nevertheless, the initial effect of the inward investment promotion policy was limited. From 1979 to 1982, there was only US$ 17.7 hundred million of FDI in China. Most of it came from SMEs in Hong Kong (Lai 2002). In 1984, other 14 additional coastal cities in China were opened successively to become SEZs. Beginning in 1985, the SEZs extended more widely to the Yangtze River Delta, Pearl River Delta, Xiamen-Zhangzhou-Quanzhou Triangle in Southern Fujian, Shandong Peninsula, Liaodong Peninsula, Hebei and Guangxi.

For the purpose of attracting Taiwanese investment, the PRC government offered additional preferential policies uniquely for the Taiwanese investors. In 1983, the PRC passed its first central-level legislation, encouraging Taiwan’s businessmen to invest in China. Taiwan’s investment was not noteworthy, however (Lee 1993). Following the KMT government’s opening up of personal visits from Taiwan to China in 1987, the PRC’s State Council moved to offer further incentives and a legal foundation for attracting investment from Taiwan. In July 1988, the regulations for encouraging investment by Taiwan compatriots law was enacted. In May 1989, two investment zones for Taiwanese firms in Xiamen and Fuzhou cities, both in the Fujian Province, were established (Chang 1995). China’s official figures showed that before 1988, the cumulative amount realized by Taiwanese investment in China was US$22 million. It then jumped rapidly in one year to US$160 million in 1989. Beyond the FDI promotional measures and the cheap labour force in the mainland, the similar cultural and language background between Taiwan and China offered Taiwan-invested enterprises (TIEs) some more investment privileges. Compared with other Western investors in China, the Taiwanese investors had greater access to some strategic investment information, thanks to that interpersonal relationship (quanxi; Billes 1999).

Since the early 1990s, Taiwan’s investment in China began to swell considerably, and it gradually diversified from cities in Fujian Province to others. On one hand, the perceived political risks fell across the Strait, and on the other hand, the wage rates in Xiamen SEZ began to increase. The change in investment location was welcomed by China’s central government as it might help to reduce the income inequality across provinces (La Croix and Xu 1995). TIEs’ shift in investment destination became obvious when China began to open more cities in coastal regions for FDI. In 1990, the Chinese government further decided to open the Pudong New Zone in Shanghai and several cities in the Yangtze River valley to overseas investment. In 1992, Deng Xiaoping pushed forward a renewed reform agenda, making special provision and more liberal policies widely available for FDI. In March 1994, the Standing Committee of the National People’s Congress (NPC) adopted the Law on the Protection of Investment by Taiwan Compatriots (Chen 1999). The enactment of the Law demonstrated Chinese government’s goodwill to offer Taiwanese investors a regulatory business environment. In the meantime, the law indicated that Taiwan’s investment should comply with China’s economic development needs.

As shown in Table 1.1, Taiwan’s investment in China rose quickly, from US$862 million before 1991 to US$3,391 million in 1994, according to China’s official figures. Taiwan’s official statistics also recorded a quick growth from US$170 million in 1991 to US$ 9,620 million in 1994. In the following years, Taiwan’s investment continued to surge until the Asian financial crisis that led to the investment decline between 1998 and 2000. ...

Table of contents

• Cover Page
• Half Title page
• Series
• Title Page
• Copyright Page
• Contents
• Figures
• Tables
• Introduction
• Part I Integration in trade and investment
• 1 Taiwan's investment in China Push and pull
• 2 Impact of intensifying cross-strait economic ties on Taiwan
• 3 Ecfa Political and economic considerations
• Part II Liberalization in people's mobility
• 4 Tourism development across the Taiwan Strait
• 5 From a passer-by to a long-term resident on the other side of the Strait
• Part III Deregulation in the financial market
• 6 Taiwan looks to expanding its financial business in China
• 7 Taiwan and RMB's internationalization
• Part IV Cross-strait economic integration in the regional context
• 8 New greater China scenarios: sustaining Hong Kong's services amid changing dyamics of cross-strait economic relations
• 9 The United States in the new cross-strait relations
• 10 Taiwan and China in the face of the rapid development of economic regionalism
• Conclusion
• References
• Index