BOOK REVIEWS

The South China Triangle and TaiwanFrom a maquilladoras zone to an integrated economy

The South China Triangle (SCT) represents probably the oldest form of economic integration in East Asia. It is unquestionably the most fully developed among such areas of growth in the region. To use Yeung Yue-man’s classification (1), the SCT is the most outstanding example of development driven by private enterprise and supported at the institutional level by governmental action. Deng Xiaoping’s decision in 1978 to adopt for the provinces of southern China a special policy favourable to foreign exchange and investment, has played a decisive role in the economic development of China and her neighbours. The establishment of Special Economic Zones (SEZs) in three cities in Guangdong (Shenzhen, Zhuhai and Shantou) and in one in Fujian (Xiamen), all of which are close to Hong Kong, Macao and Taiwan, has given overseas Chinese entrepreneurs the opportunity to move a large number of their operations to the PRC. This has been particularly attractive to those entrepreneurs from Hong Kong and Taiwan, who are able to use the Hong Kong Special Administrative Region’s status to get round certain legal restrictions on investment.

This opening up has radically altered the economic prospects of Hong Kong, whose growth is very much dependent on the availability of land and labour. The scarcity of both increased considerably in the 1990s, to the point where most manufacturing was relocated north of the border in order to make use of the land and cheap labour available there. At present Hong Kong enterprises employ nearly four million people in southern China, which is almost three times the size of the manufacturing labour force in Hong Kong itself.

For obvious political reasons, China’s dealings with Taiwan have long been carried out more discreetly. Commercial exchanges between the two countries have been almost exclusively conducted via Hong Kong. In 1995, Hong Kong was Taiwan’s main export market, and China was the end destination for around 60% of the exports. Even though Taiwanese firms have sometimes encountered obstacles from their own government, they have adopted the same strategy as their Hong Kong counterparts. Taiwan currently depends on China for as much as 30% of their production in information technology, and the trend seems likely to increase in the coming years (2). Taiwan is also officially recognised as the second major investor on the mainland: their investments concentrated in the two southern provinces. Although there is currently a northward expansion of foreign direct investment, this is still confined to the coastal strip bounded by Shanghai, Tianjin and Peking (3).

Although the SCT has undoubtedly benefited from the mutual reciprocity and the different levels of development in each of the participating regions, it seems that the process of integration has not been problem-free. The economies China and Hong Kong have become inseparably intertwined, which means, among other things, that they have both become more vulnerable to changes in their export markets. This was brought home to them in the 1990s when they were affected by US action over the granting of Most Favoured Nation status, the demand for the respecting for intellectual property rights, and the imposition of textile quotas. Questions arising from the possible devaluation of the yuan, and its impact on the peg linking the Hong Kong dollar to the US dollar, is an even more recent example.

Beyond such purely economic considerations, there are several political implications which throw light on the conditions governing current growth in this area. These issues involve the following three areas:

• Relations between Hong Kong and China: the “One Country, Two Systems” concept was the result of the 1984 signing of the Sino-British Joint Declaration and the ratification in 1990 of the Basic Law (often referred as Hong Kong’s mini-Constitution). Its practical application entails the maintenance of Hong Kong’s own economic and political system for 50 years. However, certain local decision-makers are now pointing to the transformations in the Chinese economy to assert that there is already only one economic system. According to them, the only contentious issues are the mainland authorities’ failure to respect both the rule of law, which is the principle on which Hong Kong’s economic success is based, and the principle of governmental non-intervention in economic affairs (as was shown by the recent scandal and collapse of the Guangdong International Trade and Investment Company). The Hong Kong side is afraid that Chinese control over the SAR could encourage the rise of forces opposed to democracy, while for their part, the Chinese are wary over the creation of a “greater Hong Kong” in the south of the country, because this might become a centre for opposition to Peking.

• Relations between China and Taiwan: there is no doubt that the rapid expansion in exchanges between these two territories has provided Taiwan with a large market for its export industries, but it has also increased Taiwan’s dependence on the Chinese market. And this trend has coincided with increased tensions between the two sides: such as, China’s military exercises in the Taiwan Strait in the Spring of 1996; the former president Lee Teng-hui’s pronouncement in July 1999 that negotiations with China should proceed on a “State-to-State” basis; and, above all, the election of a more openly pro-independence candidate, Chen Shui-bian, as President in March 2000. While the Taipei government has attempted to block, or at least restrict, a certain number of investment deals (one project to set up a petrochemical plant by Formosa Plastics has been put on hold, and recently investments were still limited to US$50 million per project), it favours a so-called “southwards” policy, aimed at developing co-operative links with the emergent countries of South-East Asia, which are also facing Chinese expansionism. But this strategy appears to have had little impact on the extent of the island’s dependence on the mainland, particularly as Peking has persistently made use of Taiwanese firms on the mainland to try to influence the positions of the political parties in Taiwan, as well as those of the Taipei government.

• Relations within China: Within China itself, the activities of the SEZs have had a major impact on the inequalities between the regions. Over the last 15 years, Guangdong province has experienced a far higher growth rate than the national average, which is only exceeded by those cities under direct central government control, namely Peking, Tianjin and Shanghai. There are now glaring disparities in income, sometimes even between the SEZ cities and the rest of the southern provinces. In the inland regions this remains a source of great resentment against both the SEZs and the central government, which finds an outlet in open “trade wars”. For example, in 1990, Hunan province tried to sell rice to Guangdong at well above the market price, and the Shanghai car market is still closed to vehicles produced outside the Shanghai area, as the Citroën plant in Wuhan has learned to its cost. Another consequence of these economic inequalities has been a massive flow of immigrants from the inland provinces to the coastal regions (current estimates put the number of migrant day workers at 60 million), which brings with it all the socio-economic dangers of uncontrolled migration, let alone the current political ones, like separatist movements, terrorist acts, the increase in organised crime etc.

The period since Deng seems to be characterised, at least in official pronouncements, by a wish to re-establish a certain economic balance between the provinces, and a consequent improvement in social stability. The present five-year plan, for 1996 to 2000, has been particularly concerned with raising the level of the western provinces (but still providing nothing for the central ones!), and some leaders are currently questioning the privileged treatment accorded to the SEZs. President Jiang Zemin has spoken out clearly in favour of reducing these disparities which are perceived, rightly or wrongly, as a source of resistance to the central government and as carrying a risk of national disintegration. The economic importance of Guangdong province gives it considerable political weight, and the relative autonomy enjoyed by local leaders is not at all palatable to Party cadres trying to focus popular attention on “external threats”. Attempts to extend the preferential schemes to every province have certainly not allowed the inland provinces to catch up with the levels of the coastal provinces, but they may well have prevented the gap from widening. So, are they the beginnings of a restoration of the balance in favour of the central and western regions, as the Peking authorities are proclaiming more loudly than ever? Some doubt is cast on this prospect by analyses conducted by economists specialising in the region (4), who point to the accumulation and concentration as factors contributing to the success of the SCT.

The component elements of the South China Triangle

The Chinese economy is far from being geographically homogeneous or integrated. Within the coastal regions, which were in effect the main beneficiaries of the political opening-up in 1978, the three focal centres, the south, the central region, and the north, are currently more oriented towards external trade than towards trading with each other. The south, where for historical reasons the opening first started, benefited from the proximity of the two “little dragons” (Hong Kong and Taiwan) who rapidly played the card of integrating the economy of southern China to take advantage of the way the southern partners complemented each other. This gave rise to what is usually referred to as the “flying geese” model. Unlike the structures set up by Japan, which aimed at low labour costs to support its exports, the strategy of the SCT is to play on the advantages of concentration, specialisation and the existence of a sufficient mass of consumers within the triangle (providing external economic outlets). This combination of factors affecting supply and demand is creating a much closer and more dynamic integration than is the case with direct Japanese investment in South-East Asia, for example, or the maquilladoras of Mexico.

Within the Chinese sphere, the SCT represents 16% of the working population and 147% of the GDP measured in terms of purchasing power parity per inhabitant. In trade terms it provides 72% of total exports and 69% of imports, being by far the largest centre of foreign trade, standing at 74% (or 36% measured in purchasing power parity).

The SCT is above all an economic block oriented towards supply.

Quite unlike Japan’s industrial bases, which are often isolated in special zones several thousand miles away, the economic dynamism of the SCT is founded on particularly low transaction costs (ease of transport and language of communication etc.). A second factor is the complementary match between labour and capital. As the mobility of labour is extremely restricted owing to existing political divisions, it is the increasingly mobile capital from the two ultra-capitalist “little Chinas” that provides work for the hundred million labourers in southern China and contributes to their regular increase in productivity. Chart 1 shows clearly where the labour reserves in this area are to be found.

A third factor is the SCT’s strong emphasis on exports, each of its component territories showing a particularly high volume of exports. But even more important here is the complementary match between each of them, which ensures the efficiency of the SCT as a whole. There is a co-ordination between the production of increasingly sophisticated components by Taiwan or the multinationals set up in the area to take advantage of the conglomerate set-up, their assembly in the Pearl River Delta, taken in the broadest geographical sense (5), and their export through the port facilities of Hong Kong with its commercial and financial services, or through those controlled from Hong Kong, as in the case of Shenzhen.

The supply capacity is not the only factor that accounts for the strength achieved by co-ordination within the SCT. To this must be added the equal, or even greater pole of attraction exercised on the market from the start, both in actual and future potential growth, by the leading world economic centres. This is also in marked contrast with the assembly plants in South-East Asia. The volumes involved can be measured by the current GDP figures at present rates of exchange. In these terms, Hong Kong and Taiwan account for 33% of the total GDP of China as a whole, which is as much as South Korea. The effects of “potential demand” can be assessed in terms of the various GDPs expressed in purchasing power parity, since the historic tendency of domestic prices is to conform to global prices. The GDP of Fujian province is equal to that of Hong Kong, and that of Guangdong province represents the highest potential demand in the SCT, with 32% of the latter’s GDP expressed as equivalent purchasing power.

The interdependence between the sectors, and its dynamic

From Hong Kong’s point of view, the opening of the SEZs in southern Guangdong and Fujian encouraged an initial wave of industrial relocations, which more or less eliminated the Territory’s entire manufacturing industry. Between 1985 and 1998, the manufacturing sector’s contribution to GDP fell from 22.1% to 6.2%, and direct exports have continued to decline. But this trend should not give the impression that the Territory has abandoned manufacturing altogether. At present nearly 4 million people in Guangdong province are employed in industries financed by Hong Kong capital, which amounts to ten times the size of the manufacturing population in the SAR itself. In addition, around 120,000 Hong Kong people regularly work north of the border, particularly in clothing, toys, watch-making and electronics. These sectors are increasingly engaged in global trade. At the same time, a rising number of Hong Kong people make their purchases every day in Shenzhen, spending HK$27 million in 1999 for a GDP of HK$64.9 million (6).

This ongoing withdrawal from direct involvement with the Territory itself has nonetheless allowed Hong Kong to become increasingly specialised in tertiary services for all three poles of the SCT, such as finance, commercial transactions, transport, tourism etc. While some of these operations, such as transport and information services, are also being relocated in their turn, the rapid rise in the new information technologies is bringing about a shift towards a new concentration of specialised services. Most leading Hong Kong groups are turning towards business on the Internet, and this promises to make Hong Kong a global communications centre. From Taiwan’s point of view, integration in this southern triangle has brought forth two new features. Several thousand Taiwanese firms have found in the SCT resources enabling them to compete on a world scale, providing the means to scale up their production, and to penetrate the domestic Chinese market, particularly in electronics (Acer now has one of its largest factories there). At the same time, a large number of these firms have managed to avoid depending on assembly in a single region, whether that might be in the Shanghai region or the North in the case of China, or in the Philippines or Vietnam for the rest of Asia, or even elsewhere in the world, like Mexico or Europe even.

Guangdong and Fujian provinces have benefited from the policy of opening up and have considerably increased their manufacturing role in the SCT, aided by the relocations from Hong Kong and Taiwan. Although the Pearl River Delta is a leading world producer of toys, and a centre for textiles and electronics, it is much more than simply a region for cheap assembly along the lines of the Mexican maquilladoras. This is due to local conglomerates like Kelon and TCL, which were set up in a competitive environment and were able to take advantage of their access to the Chinese consumer market. The increase in the average level of added value in exports from Guangdong as noted by Françoise Lemoine (7), confirms the overall rise in production in the region. Moreover, a centre as highly developed as Shenzhen, for example, can attract skilled labour from the whole of China, and it also acts as a magnet for Hong Kong enterprises engaged in research and development, whose numbers are increasing in the tertiary sector (8).

Enterprises in the South China Triangle: from local to global

With regard to size and importance, firms from the Chinese area of the globe only account for 7% of the turnover of the thousand leading Asian enterprises, including Japan, yet they represent 14% of the total number. The dynamism of the SCT has depended as much on local conglomerates as on a tight web of small and medium-sized enterprises (SMEs), even though it has also benefited greatly from the presence of leading world consortia located in Hong Kong. The SMEs in China alone have seen their share of industrial production rise from 9% in 1978 to the current level of over 40%, and this ratio is nearer 80% in Guangdong. These locally based firms, which are more deeply steeped in a competitive ethos than those from elsewhere, are becoming more and more the sturdy industrial backbone of southern China. However, the regional and global competitiveness of the SCT is supported through enterprises based in Hong Kong and Taiwan which, as Table 2 shows, compare very favourably with those of the PRC or the ASEAN countries. Their main contribution has been to provide the framework for the record levels of foreign direct investment (FDI) enjoyed by China over the last 15 years, and especially by the southern provinces. The Asian crisis did not put a brake on this development, for two reasons:

• Despite the stability of the official level of the yuan in the face of the devaluation of the other Asian currencies, investors from Hong Kong and Taiwan have managed to keep operational costs in China relatively low. This has been due both to the low salaries there and the overall advantages arising from integration leading to large increases in productivity. Elec & Eltek, and Johnson Electric are two SAR companies with a strong presence in southern China (the former with 47% of its turnover and 50% of its labour force there, and the latter with 93% of its labour force), and they both report that, despite the 40% devaluation of the Thai baht, their operational costs in Thailand are still 20% higher than in China. This competitive advantage in a very competitive regional environment has actually led to an increase in levels of production in China, and it explains the current recovery of exports there.

• The necessities imposed by globalisation are increasingly affecting companies in the SCT, in both manufacturing and services. This is forcing companies from Hong Kong and Taiwan (such as Acer and Compal) to increase their competitiveness and to raise their levels of productivity, in order to gain at least a regional profile. Hence the delocalisation of everything that can be delocalised. Even locally based conglomerates like Kelon and TCL are in a process of consolidation to gain a leading position in their areas of strength (the general public) and to exploit new technologies like mobile telephony.

As far as brand image is concerned, the SCT companies are at present rather weak. Despite their considerable productive capacity, relatively few of them enjoy a well-known brand name. And despite the high technological levels of firms like Acer or Taiwan Semiconductors Manufacturing Corporation, most Taiwanese firms still depend largely on Original Equipment Manufacturing (OEM) or Original Design Manufacturing (ODM) contracts to gain access to overseas markets. This limits their ability to become international. OEM production currently represents nearly 65% of total production in information technology, reaching highs of 80% in portable computers. Taiwan companies are notorious for their low research and development (R&D) allocations, and this holds them back to sub-contracted production. R&D averages at 3% of their total budget, which is a third of the amount invested in Japan and half of the amount in Korea.

In case Taiwan and China commercial relations were normalised…

Hong Kong and Taiwan are two of the major trading partners for mainland China. As they specialise in different sectors, they tend to be complementary to each other. The ban on direct links across the Taiwan Strait has given Hong Kong a guaranteed income from its situation as the indispensable intermediary enabling dynamic bilateral relations between the two economies. But for several years now, and particularly since the return of Hong Kong to China in 1997, there are clear signs of an erosion in this situation, beginning with the bypassing of Hong Kong in cross-Strait relations (9).

As far as regular trade flows are concerned, although Hong Kong is still an important point of entry for Taiwan firms to have access to their factories in southern China, the central and northern provinces are being increasingly penetrated by Japan and Korea, and their exports to the PRC take place on a quasi-direct basis (10). Between 1989 and 1997, direct exports to the PRC increased by an average of 50.4% per annum, compared with a 16.3% rise in indirect exports. Direct exports now represent 60% of the total. Whereas Hong Kong handled 85% of Taiwan’s exports to the PRC in 1989, ten years later the Territory was only handling 40%, and now this “trade triangle” only accounts for 6% of Hong Kong’s total trade and 12% of its maritime trade.

With regard to FDI, the period before the handover saw a significant withdrawal of Taiwanese investors from Hong Kong. Being cautious investors, the Taiwanese seem to prefer other independent offshore bases from which to invest in China, particularly the Virgin Islands, which accounts for 31% of the legal Taiwanese investment in China. If one subtracts from the total investments from Hong Kong the following three categories: FDI from Taiwan (around 25%); “circular” foreign investments originating in China and reimported for purposes of tax avoidance (about 40%); and foreign investments from other sources (principally Japan); it turns out that Hong Kong itself is not a major investor in China. But at the same time its dependence on China (88% of China’s FDI) is quite considerable. Unlike Taiwan, which has a much more balanced geographical distribution in its direct overseas investments, Hong Kong seems to be very exposed to potential fallout from any political upheaval between Taiwan and the PRC.

In addition to economic factors, like reduced transport costs, there are other political ones which explain the reduction of Hong Kong’s profits from the China-Taiwan trade. These arise from Taiwan’s desire to maintain a balance in its overseas economic relations. It is quite clear that the return of Hong Kong to China is perceived rather more as yet another source of pressure from the PRC than as a confirmation of Hong Kong as a neutral intermediary, as in the past. Starting in the Autumn of 1997, and more recently again with the visa issue, certain symbolic events have increased this fear. The incoming President Chen Shui-bian’s declaration, that “We will not be the next Hong Kong”, contains two messages for the SAR: Taiwan intends to maintain its policy of global diversification and, in the absence of any normalisation of its relations with the PRC, it prefers to forge its own direct links, rather than depend on an intermediary that has become less reliable.

This pattern in investment distribution can also be seen in trade flows. Here too Taiwan is geographically much more diversified and balanced than Hong Kong. None of its trading partners, except the United States, is really dominant. Taiwan has also progressively diversified its sources of production, particularly in South-East Asia (it is the second largest investor in Vietnam), in Central America (the Mexican maquilladoras), and in Eastern Europe.

This situation confronts Hong Kong with a dilemma. On the one hand, it stands to lose if relations between the two sides of the Taiwan Strait go off the rails, because its presence in southern China complements Taiwan’s presence in southern China (without industry there can be no services). On the other hand it also has a great deal to lose if normalisation of ties across the Strait is too rapid. In principle, the Territory would benefit from good relations across the Strait, since these would be advantageous for the whole of China, including southern China with Hong Kong at its commercial hub… provided, of course, that Hong Kong shifted from its role as trans-shipment intermediary to producer of competitive services. This challenge does not specifically arise from Taiwan, because the question of Hong Kong’s competitiveness in general recurs daily as a necessary condition for sustainable medium-term economic recovery.

Economic integration for Hong Kong?

For what must surely count as a first in such an important speech as the Chief Executive’s Policy Address (in which he presents the broad outlines of the Territory’s economic and social policy), the integration of Hong Kong into the Pearl River Delta region has been spelt out as a future strategic direction. Hong Kong has long been considered a gateway to China, but it has always been under fire from the Peking authorities, who make no secret of their intention to shift the balance in favour of the large cities to the north. Now it is clearly thinking of negotiating a regional shift by taking on the mantle of a metropolitan centre, on the level of New York or London (explicitly stated), in relation to the area comprising Guangdong and Macao, to which could be added the other provinces of southern China, Fujian and a part of Taiwan. A quick calculation shows that in 1998 this overall region of southern China represented around 410 million people, more than 50% of the GDP of the whole of China, and 65% of its exports to the rest of the world. Projections based on the perspective of the economic integration of this whole region would actually be quite viable. There are four planks to this integration policy which would have to be adopted, whether it is a question of concerted action with the Pearl River Delta region or of repositioning Hong Kong within this whole entity. They are as follows:

• The environment: here what is needed is a common policy with the Guangdong authorities, particularly over the control of traffic pollution and water treatment, but also with a view to establishing Hong Kong as the “green city” in the region. There is nothing to prevent the emergence of a new service sector to deal with green issues for the whole of China in the future.

• Transport: Hong Kong cannot avoid the fact of being increasingly bypassed in favour of the infrastructures in southern China. But this calls for a dynamic response, consisting of strengthening Hong Kong’s efficiency as the regional hub, partly by reinforcing its dominant position at the centre of local air links (multi-modal facilities need to be developed at Chek Lap Kok), and partly by expanding its rail and road links with southern China, especially Shenzhen, in order to extend its connections with the inland regions.

• Education and vocational training: the growing criticisms over labour costs in Hong Kong are just an indirect acknowledgement that the skills gap separating the Territory from the mainland has widened. This calls for concerted action in the educational field, partly to respond to growing demand from the hi-tech industries, but also to foster intellectual flexibility and a common managerial approach towards the specialised labour force attracted to centres like Shenzhen or the universities of southern Guangdong.

• Finance: the southern region really has no other financial centre apart from Hong Kong. But the developments in China and the world at large pose a challenge to Hong Kong. The announced merger of Hong Kong’s two financial markets, the Hong Kong Stock Exchange and the Hong Kong futures market, which occured in May this year, is aimed at recapturing the initiative at a time when the large companies in both China and Hong Kong are shares on other markets. For this reason, the delay in the creation of a second market, the Growth Enterprise Market, has been rapidly overcome in order to accommodate the growing number of new companies in the field of new technologies and services.

Two further planks need to be firmly put in place:

• The differing functions assigned to Hong Kong as a Cyberport and to the various projects linked to the new information technologies in China, must be clarified.

• The need for untrammelled telecommunications links between Hong Kong and the southern provinces is still a major grey area, because unhindered communications are indispensable for true regional integration in the new technological field.

A provisional resolution of the above seems to be gradually emerging, in the form of an increasingly integrated Hong Kong-Shenzhen conurbation, but on the condition of Peking’s growing control over Hong Kong to avoid any risk of things getting out of hand politically (11).

What does the future hold for the South China Triangle?

To conclude this analysis we would refer to the question posed by our title. Can the SCT develop from being a zone of maquilladoras to becoming a major integrated economic zone in Asia? Throughout the 1990s the economic and political factors described above have clearly tended in that direction. The almost perfect mutual fit between the three participating blocks has created a virtuous upward spiral and laid the foundations for the appearance of a new economic centre in Asia. This has at its disposal an increasing autonomy in the technological, financial, industrial and logistical fields. Yet history could again take its revenge on geography. To quote Paul Krugman (12): “at least with regard to the spatial location of economic operations, the proposition that an economic formation is largely influenced by historical contingencies is not a metaphysical hypothesis, but a simple fact”.

Born out of Deng Xiaoping’s policy in 1978 of opening up to the outside world, the SCT will most probably be influenced by the new political directions in Chinese affairs: the return of Hong Kong to China in 1997, the firm re-establishment of central control by the premier Zhu Rongji, which was aimed particularly at the allegedly generalised corruption in the south, and finally the new stage in the relations between Peking and Taipei, precipitated by President Jiang Zemin and the outcome of the Taiwanese presidential elections in March of this year. As long as there persists any ambiguity around the rival concepts of its status as a regional or a national formation, the SCT will still be an area of rapid expansion but it will be subjected to such economic and political pressures that it will probably be unable to assert itself as a real centre of Chinese affairs, and still less as a pan-Asian centre. Unless, of course, China moves in a more federal direction… And that possibility is probably what is also in the minds of the Taiwanese entrepreneurs who are redirecting their new investments further north.

Translated from French by Jonathan Hall