The long game

The thaw in cross-Strait relations sets up some intriguing possibilities for the evolution of business in the Greater China region. It adds up to increased competition that should be a stimulus but just as surely can cause discomfort, particularly to those who have enjoyed comfortable niches exploiting the differences in the respective trade and financial systems of Taiwan, Shanghai, Hong Kong and Shenzhen.

Clearing the various political barriers to cross-Strait movements of money, goods and people will of course take time, but it is as well to think through some of the consequences.

First, Taiwan. The easing of restrictions – often circumvented as they were – on Taiwan investment in the mainland will encourage factory relocation. This fits in with mainland desires to get higher- value-added business, but will lead to a hollowing out of some of Taiwan’s more sophisticated manufacturing. Increased transport costs caused by fuel prices will add to pressure for Taiwan firms to manufacture, not just assemble, on the mainland.

For Shanghai and the neighboring region, regular direct flights to Taipei are far more likely to benefit the Taiwan city then their own. The absence of direct links has seen tens of thousands of Taiwan people settle in Shanghai, not only to run factories but to provide capital and modern ideas and management for its service industries. However, many of those people might actually prefer to live in Taipei – it’s cleaner, more orderly and has better health facilities – or at least commute regularly between the two.

A transit point no more
Hong Kong faces the biggest potential challenge. It will lose much of its air transit traffic – 14% of flights arriving in Hong Kong are from Taiwan, of which  perhaps half are Taiwan people who would, given the chance, fly direct to the mainland. Taiwan-mainland traffic also accounts for about 7% of transit shipments passing through Hong Kong’s ports, although rising air traffic and the emergence of ports in Shenzhen means the Taiwan issue is now quite marginal.

It is less so to the financial sector. If Taiwan-mainland exchanges were as free as Hong Kong-mainland ones, there would be a significant loss of business – and perhaps too the return of Taiwan-controlled listed companies to their home market. Companies such as Foxconn International have only listed their mainland operating units in Hong Kong because of restrictions which are likely to be abolished soon.

At some point, mainland companies may be allowed to list in Taiwan, threatening Hong Kong’s position as the international exchange of choice.

Hong Kong could also lose its prime spot as the focus of mainland tourism and investment, and, in the longer term, its status as a corporate hub. Liberalization of service industries and easier access to work visas for foreigners may see some regional or Greater China headquarters shift from Hong Kong to Taiwan. If firms are granted the same freedoms as in Hong Kong, Taiwan may be able to capitalize on its industrial expertise – in petrochemicals, textiles, steel as well as electronics – and develop into a valuable service center.

Ruined ambitions
Shenzhen and the Pearl River Delta face different challenges. Firstly, Taiwan-owned factories moved there because of its proximity to Hong Kong as a transit point. With direct links, they might well prefer closer, or less costly, locations.

A sharp slowdown in the region’s growth as a manufacturing center would threaten the huge port development ambitions of Shenzhen and its neighbors. Further pressure could come from Taiwan’s ports, enjoying a new lease of life thanks to direct links with the mainland. Kao-hsiung, for example, has the potential to become a regional port hub linking the China coast to both Northeast and Southeast Asia.

Meanwhile, Shenzhen’s dreams of becoming a financial center with international clout would face competition from Taiwan as well as Hong Kong. Relative to Shanghai, its stock market is of declining significance, and continued liberalization of the mainland economy will be a disadvantage for privileged zones such as Shenzhen.

All this is of course speculative. But just as the opening of the mainland to Taiwan investment has been a key to China’s economic growth over the past 15 years, so any normalization of commercial relationships will continue to have a profound impact on the cities of Taiwan and the China coast.