Rocky relations

For more than a decade, Taiwan investors have flocked across the Tai-wan Strait to Xiamen, accounting for a large chunk of foreign investment in this tiny port city of Fujian province. Such is their presence that Taiwan companies account for more than 40 percent of Xiamen's industrial output and its tax base, paying more than Ynlbn in taxes a year.

This all began to change last year as the island's actual investment in Xiamen plunged by 23 percent on the 1999 level to US$1.03bn and the value of projects approved fell 21 percent to US$ lbn.

Declining investor sentiment
Xiamen has traditionally been the third largest recipient of investment from Taiwan, following Guangdong and Jiangsu, but in recent years Taiwan companies have been shifting their investments north. Experts say the Xiamen government's emphasis on the environment and its new focus on high-technology industries are partially responsible for declining Taiwan investor sentiment.

The government announced in March that it would promote the development of high-technology industries, including information technology, biological technology and new materials.

"Xiamen is trying to make the city a clean place and is no longer encouraging investments from some of Taiwan's traditional industries, such as footwear and textiles," says a local economic official. "The city is trying to attract more high-tech companies."

Mr. Zhang Guangmin, vice director of the Fujian Office of Taiwan Affairs, confirms this shift in emphasis: "Previously, the government encouraged all investments. Now it mainly gives priority to Taiwan investment in information technology, electronics, and the automotive and agricultural sectors"

Zhang believes that Taiwan investors are now more experienced in doing business in the Mainland, and are no longer lured by family ties or a common language. He says investment conditions are the most important priority for Taiwan companies.

Mr. Xu Junda, president of the Association of Taiwanese Investment in the provincial capital of Fuzhou, says that more than 200 Taiwan companies have left Dongguan in neighbouring Guangdong province, and another 10 have abandoned Fujian, to set up in the area around Zhejiang and Jiangsu provinces and Shanghai. This was because these areas have become more competitive in recent years, and more aggressive in attracting new investments.

Investors are also being affected by last year's smuggling scandal in Xiamen, in which senior local government and customs officials have been implicated. Lost import duties from the smuggling in Xiamen of cars, cigarettes and other goods are estimated to have cost China's treasury US$3.6bn.

While the clean-up has dampened run-away corruption in the city, it is also making it more difficult for Taiwan entrepreneurs to do business. Many Taiwan investors in the city operate in a grey area, skirting regulations governing pay, benefits and working hours, and they say the clean-up is hindering their ability to make a profit.

"Everyone has become very conservative since the scandal," says one Taiwan investor, who declined to be identified. "Whatever regulations Beijing hands down now, Xiamen follows completely, and this is increasing our overheads. Other places are not that efficient in enforcing the regulations."

Zhang, of the Fujian Office of Taiwan Affairs, also points to "the uncertainty of cross-Strait relations," which he says has made Taiwan investors uneasy. Relations between the two sides, already difficult, took a turn for the worse last year following the election of Chen Shui-bian as president of Taiwan, a member of the pro-independence Democratic Progressive Party.

Promise to relax restrictions
Chen had promised to soon relax the government's `no haste, be patient' policy that limits Taiwan investments in individual projects in the Mainland to US$50m, and bans investments in high-tech or infrastructure projects. However, in March he warned local investors to be aware of the risks of investing in the Mainland. The warning came days after the island's China Times Express reported that the Mainland operations of Taiwan's Chi Mei Petrochemical Group – one of the 10 largest Taiwan investors in China – had been ordered to shut down because of the pro-independence stance of its chairman, WL Shi, a close friend of the president.

"We have to remind the Chinese communist authorities that once the Chi Mei Group is asked to close its plants on the Mainland, there will be a very serious negative impact on economic ties between the two sides of the Taiwan Strait," said Su Cheng-ping, Taiwan government spokesman.

China and Chi Mei both denied the report, but Beijing hit back a day later adding fuel to the debate over Taiwan investment on the Mainland. "There is no way we will allow anyone to engage in such activities, fishing for political benefit in Taiwan, then fishing for economic benefit on the Mainland," Shi Guangsheng, Minister of Foreign Trade and Economic Co-operation, told reporters in Beijing.

Positive outlook
Despite the downturn in investor willingness, Taiwan companies already in Xiamen remain bullish on the port city.

In the midst of the current dispute, Tai-wan Airport Service Co signed an agreement with Xiamen Airport Services Group to jointly provide aviation cargo services at Xiamen international airport, the first such aviation venture between civilian aviation companies from the two sides.

The joint venture will engage in domestic and international air cargo operating out of Xiamen. The Taiwan side will hold 49 percent of the equity and appoint the general manager. Initial capital, investment has been set at Yn220m.

Ms Eva Sung, director of Hwa Xia Industrial, a large Taiwan footwear manufacturer that moved here in 1988, praises the SEZ administration, saying that officials herehave been professional and willing to help companies in the zone solve problems. "This is still a very good place to invest," she says. "If I had to make the choice again, I would choose Xiamen."

The mini-three links trade and shipping links between the Taiwan-controlled off-shore islands of Quemoy and Matsu and Xiamen and Fuzhou in Mainland China kicked off in January, marking the first direct links between the two sides since 1949.

Prior to the opening of these links, trade between these islands and the Mainland had to go through Macau or another third territory. However, the opening of the links has not resulted in any sudden surge in economic ties between the two sides.

"On the one hand, the mini-three links represents a step toward opening the real-deal, bona fide jumbo-three links between Taiwan and the Mainland," says Mr John Tkacik, president of China Business Intelligence, an American consulting firm. "But on the other hand, the mini-three links basically just decriminalise the petty smuggling that already thrives between the offshore islands and the Mainland."

Tkacik says these exchanges are limited to people who have residence on the islands, and that a strict ban remains in effect on trans-shipping goods from Taiwan to the islands and then on to the Mainland and vice-versa.

Shipping companies gave a lukewarm response to the new trade channels, saying that the Taiwan ports involved are so small, only feeders can be used, and that this offers limited revenue. Beijing officials were cool to the opening of the mini-links, repeating their call for unhindered direct links between the Mainland and Taiwan.

Call for direct links
Mr. Chen Conghui, deputy mayor of Xiamen, travelled to Taiwan in March on a trade pro-motion visit, calling for the early opening of direct shipping links between Taichung, on Taiwan's west coast, and Xiamen, the closest coastal cities between the island and the Mainland. Chen said the links would reduce travel times and lower costs for manufacturers on the two sides.

Lin Po-jung, chairman of the Taichung World Trade Centre (TWTC), and former mayor of the city, said the TWTC had filed for permission to set up direct industrial and business links with Xiamen, which he said would allow Taiwan personnel and commodities to travel directly from Taichung harbour to Xiamen. Lin said he hoped this new channel would open by mid-April.