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Taiwanese Investments in ChinaThe Squaring of the Circle

There is no reliable data, from whatever source, on Taiwanese investment in China. Some writers state that, taking into account direct and unlawful indirect investment, the official figures should be doubled (1). But which official figures? Sources in Hong Kong put the value of contracts signed by Taiwanese businessmen on the mainland at between US$10.5 billion to US$20.4 billion by the end of 1992 (2). Japanese sources suggested US$15 billion for the same period (3). More recently, the American and Taiwanese press have often mentioned a figure of over US$20 billion invested by 25,000 firms (4).

The uncertainty resides in the lack of reliability of the statistical sources. The two main ones are the Investment Commission of the Taiwanese Ministry of Economic Affairs (MOEA) and the Chinese Ministry of Foreign Trade and Economic Cooperation (MOFTEC).

The current regulations applying in Taiwan concerning the direct investments of Taiwanese firms abroad stipulate that businessmen must declare their investment to the Investment Commission, whatever the host country involved. However, investments in mainland China are dealt with in a special manner: 1) Taiwanese firms must invest indirectly on the mainland, that is to say that the capital must transit via a third country; if the total of the sums invested is more than US$1 million, the investment must be made under cover of a company registered in such third country (shell or offshore company); 2) whatever the amount of the investment, prior approval of the commission is required, even if it is for reinvesting profits made locally; 3) since July 1st 1997, the maximum cumulated amount which may be invested by an individual business is linked to its nature and size (the ceiling is fixed at NT$60 million, that is US$1.8 million, for individuals as well as small- and medium-sized firms, then varies in accordance with the firm’s capital); the entire capital raised for a given project cannot exceed US$50 million; if a project goes beyond this amount, it will be examined by a commission which will rule on its benefit to the economic development of Taiwan; 4) a greater number of fields of activity are banned from investment and, since May 14th 1997, fines of from NT$1 million to NT$5 million (from US$30,124 to US$150,621) are provided for breaches.

Two major statistical distortions result from these regulations: on the one hand, the constraints imposed by Taipei are prompting some businessmen not to declare their investments to the MOEA, whilst on the other the obligation to invest via a shell company is contributing to concealing the source of capital such as it is recorded by the authorities in the People’s Republic.

The MOEA keeps a record of investment projects in China, on the strength of the declarations of the island’s businessmen. But, not only do a portion of them invest on the mainland without informing the Taiwanese authorities (to save time on administration procedures, avoid paying taxes, or else if they invest in a banned area), but neither is there any guarantee that the declared value of the projects corresponds to the amounts that are really invested.

For its part, the MOFTEC keeps track of the investment contracts signed by Taiwanese firms. The distortions are to be found on two levels: the value of contracts and the source of the capital. By dint of the fact that goods and equipment are incorporated into the capital outlay, the value of the contracts depends particularly on the way in which these tangible assets are valuated. Both the Taiwanese investor and the local authorities will have the capacity to falsify their real value. Nor is the origin of the capital always easy to determine. It is a matter of common knowledge that businesses officially classified as Taiwanese (or from other countries), are directly financed by mainland Chinese (relatives or friends), or by Chinese capital first transferred to Hong Kong, and which then resurfaces in the form of foreign investment in order to benefit from the preferential conditions (which is thought to account for 25% of foreign investment in China (5)).

But we also have a very fuzzy idea of the way in which the communist authorities keep a record of Taiwanese firms in general. In theory, things are straightforward: the procedure for registering Taiwanese investments is quite distinct from that for other foreign investors. Yet, the reality is far less clear, especially given that a good number of the island’s firms invest in the name of a shell company (often Hong Kong-based). According to some officials, what counts is the nationality of the investor and not the country where their business is registered. But others state that an investor is free to choose to have his capital recorded under the heading “Taiwanese investment” or under that of the country where the business is registered. This also applies to Taiwanese businessmen in possession of an American passport, for example. The first option enables them to benefit from the advantages granted to Taiwanese citizens alone, whereas the second theoretically guarantees better protection in case of a clash with the Chinese authorities.

It follows that a part of the investments registered in Chinese statistics as being Hong Kong-based (or even American-based) are in fact Taiwanese investments. The extent of this phenomenon appears in a survey carried out in the Pearl River Delta by an association of Taiwanese businessmen, in which it is revealed that a third of the businesses listed in the People’s Republic as being from Hong Kong are supposedly run by Taiwanese businessmen (6).

Beyond these ambiguities, we should not forget that investment contracts or agreements (touzi xieyi) do not represent the sums really invested. That is why Peking also treats actual investments (shiji touzi) as a separate category. Whilst the latter might be closer to the reality, the question of the source of the capital is still a relevant one.

The main advantage of the statistics published by Taipei is that they take into account the number of firms. The rule is that a firm is counted once and for all when it lays down its first investment project, but is not counted subsequently. The all-up number of “cases” (jian) or projects appearing in the statistics at any one time is therefore equal to the total number of firms having invested up to that time. At the end of 1997, this figure was 20,362. “Withdrawals” of investment projects are normally taken into account.

The statistics published by Peking keep a note of the number of investment contracts. This means that several investment projects made by one and the same firm would be counted as a single “case” by the MOEA, but as several “cases” by the MOFTEC. The accumulated number of contracts reached 37,145 by September 1997. It seems that this number is not adjusted when businesses fold, although officials claim the opposite.

The figure published by Taipei is without question an underestimate. It is true that its reliability increased greatly in 1997, after the MOEA had granted a remission period to firms having invested illegally on the mainland, so that they could straighten out their situation, and during which nearly 8,000 firms came forward. Nonetheless, it is likely that such a figure still falls short of the reality.

Another available figure is that of businesses registered by the local authorities, whose statistics have been collected by the associations of Taiwanese businesses in China. This is very far from being perfect, as the inventory is incomplete and was carried out at different times (1995 or 1996) depending on the province, but it is a more solid basis as it involves spot-check calculations, thereby avoiding the problem of business closures. This figure is 23,065 firms, which can no doubt be regarded as being on the low side. We could then rely on the enquiry undertaken in the Pearl River Delta, extrapolating it to China as a whole in order to make an upper estimate. If one third of firms classed as being from Hong Kong by the Chinese authorities are in fact Taiwanese, that would bring the accumulated number of investment contracts signed by the island’s businessmen to 95,370. If we keep the same proportion—37,145 contracts for 23,065 firms, that is on average 1.61 contracts per firm—the upper estimate would therefore be 59,236 Taiwanese firms in China. If we are talking about firms that are effectively owned and run by Taiwanese in China, the figure is no doubt closer to the lower estimate (23,065); but if we include firms with a minority Taiwanese stake and businessmen engaging in a “mix” of sub-contracting and investment, or even putting-out (subcontracting of small manufacturing jobs to individuals), then we would perhaps be closer to the upper estimate.

Estimating the amounts invested by the Taiwanese in China proves to be even more difficult. While the MOEA statistics have considerably improved in terms of the number of firms, this is far from being the case for the value of investments. The figure of US$11.2 billion of accumulated investments at the end of 1997 is a rock-bottom one. The US$17.4 billion worth of actual investments announced by the MOFTEC (total as at September 1997), although more realistic, is no doubt still an underestimate. For an upper estimate, if we apply the previous method to the value of actual investments, we end up with the following result: US$56.6 billion. If we deduct 25% from this sum for mainland Chinese capital invested under the name of the Taiwanese, that would give US$42.5 billion. Opting for this latter figure would mean that more than half of the capital invested by the Taiwanese in China does not appear in any statistic. That is not inconceivable given the Taiwanese businessmen’s dislike of official channels. If now we take into account money of Taiwanese origin (profits made locally, capital crossing the border by official or unofficial channels), independently of the way in which it is used once it has entered the mainland, we can speculate on a figure of US$56.6 billion.

It is estimated that somewhere between 23,000 and 59,000 Taiwanese businessmen have invested from US$17 billion to US$56 billion. That is a very broad framework for a phenomenon whose real extent is difficult, not to say impossible, to grasp as the paths taken by investments are very often circuitous ones. To appreciate this all we have to do is take a look at the structure of foreign investment in China over the past three years. At the very time when foreign investment was being reduced in absolute terms, its structure by source country was also undergoing change. Firstly, the dominant position of Hong Kong (and Macau) appears less clear-cut than is often said to be the case. Not only is Hong Kong’s portion reduced by 10% if we assume that one third corresponds to Taiwanese investment (it also hides Japanese or American capital, moreover), but it has also dropped substantially in three years. Next, out of the Caribbean emerge the tiny British Virgin Islands: nearly 10% of foreign investment in China in 1997. When we know that, according to the MOEA, the British possessions in America (the Virgin Islands, the Cayman Islands) accounted for 27% (US$0.37 billion) of all Taiwanese investment abroad (outside China) in 1995, 37% (US$0.81 billion) in 1996 and 36% (US$1.05 billion) in 1997, the lion’s share being in the banking and insurance sectors (US$0.57 billion in 1997), we can only wonder about the tortuous paths taken by Taiwanese—and perhaps other—capital before ending up in China. By encouraging some firms from the island to leave the “fragrant harbour” for other third territories, the handover of Hong Kong to China on the July 1st 1997 has contributed to highlighting this phenomenon. More than ever, trying to estimate the value of Taiwanese investments in China is like squaring the circle.

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Notes

1. Qi Luo, Christopher Howe, “Direct Investment and Economic Integration in the Asia Pacific : The Case of Taiwanese Investment in Xiamen”, in David Shambaugh, Greater China: The Next Superpower?, New York, Oxford University Press, Studies on Contemporary China, 1995, p. 97, note 4.

2. Ricky Tung, “Economic Interaction Between Taiwan and South China’s Fukien and Kwangtung Provinces”, Issues and Studies, vol. 29, no. 7, July 1993, p. 28 (figure taken from Jingji ribao (Economic Daily), Hong Kong, December 15th 1992, p. 1).

3. Zhang Xiaohe, “The Third Foreign Investment Wave in Mainland China: Origins, Features and Implications”, paper presented at the second conference on “Pacific Basin Business and Finance”, Chinese University of Hong Kong, May 27th-28th 1994, p. 8.

4. See, for example, Asian Wall Street Journal, December 2nd 1996, p. 11, or Free China Journal, January 10th 1997, p. 8.

5. Zhang Xiaohe, op.cit., p. 6.

6. Jingji ribao (Taiwan), June 15th 1996, p. 11.

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Graph – Taiwanese investments in China, cumulated amount: 1983-1997 Summary of statistical data

37,145 number of conctracts signed by Taiwanese firms (only until September).

20,362 number of Taiwanese firms registered with the MOEA.

23,065 number of Taiwanese firms registered by Chinese local authorities (data gathered in 1995 or 1996 by the associations of Taiwanese firms in China).

59,236 high estimate of the number of Taiwanese firms in China.

Hypothesis 1 one third of the firms registered as being from Hong Kong are actually from Taiwan.

· number of contracts signed by Hong Kong and Taiwan’s firms:

before adjustment Hong Kong = 174,674; Taiwan = 37,145;

after adjustment Hong Kong = 174,674 x 2/3 = 116,449;

Taiwan = 37,145 + (174,674 x 1/3) = 95,370.

Hypothesis 2 each firm has signed 1.61 contract on average (37,145/23,065).

· total number of Taiwanese firms : 95,370/1.61 = 59,236.

(in US$)

36.544 billion total value of contracts signed by Taiwanese firms (only until September).

11.208 billion total value of investment projects registered with the MOEA.

17.388 billion value of actual investments (only until September).

56.6 billion first high estimate for the value of actual investments (see hypothesis 1).

before adjustment Hong Kong: 117.5; Taiwan: 17.4;

after adjustment Hong Kong: 117.5 x 2/3 = 78.3;

Taiwan: 17,4 + [117.5 x 1/3] = 56.6.

42.5 second high estimate for the value of actual investments (see hypothesis 3).

Hypothesis 3 25% of foreign capital come from the PRC and are re-invested through Hong Kong => 56.6 x 0.75 = 42.5.

Source: Investment Commission, Ministry of Economic Affairs, Taipei. Ministry of Foreign Trade and Economic Cooperation, Pékin (in Liang’an jingji tongji yue bao, no. 63, November1997, p. 46). Straits Exchange Foundation, Taipei.

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Table – Breakdown of foreign investment in China (actual investments)

After adjustment (see hypothesis 1) Hong Kong and Macau : - 1 / 3 Taiwan : + 1 / 3

Source : Ministry of Foreign Trade and Economic Cooperation (in Liang’an jingji tongji yuebao, n°63, novembre 1997, p. 47)