Pax Sinica: Geopolitics and Economics of China's Ascendance

7: The Greater China Growth Triangle in the Asian Financial Crisis

This chapter focuses on the economic cooperation between Hong Kong, Taiwan, and mainland China to examine (a) the impact of the Asian Ànancial crisis on trade and investment Áows among the three entities and (b) their longer-term implications for China as a whole in the context of economic integration among nations. Throughout the chapter, the term Greater China will be used to refer to the three Chinese locations. Greater China as a process of economic integration Hong Kong and Taiwan, small as they are in population and geographic area, are by no means unequal economic partners of their huge mainland Chinese neighbour. Hong Kong’s gross domestic product (GDP) per capita in 1997 stood at US$26,369 and Taiwan’s was US$13,233, compared with probably not more than US$860 for mainland China. Dollar for dollar, that is, without adjusting for possible implications of the purchasing power disparities between the respective currencies, the combined GDP of Hong Kong and Taiwan is surprisingly some 51% of China’s (in absolute terms, China’s GDP was US$900.88 billion in 1997). The Hong Kong government’s budget expenditure alone, totalling US$22.4 billion in 1997, is equal to around 20% of China’s national budget expenditure of US$111.39 billion. In short, the remarkable economic importance of both Hong Kong and Taiwan has signiÀcant bearing on their economic relationships with China. * Reprinted from “The Greater China Growth Triangle in the Asian Financial Crisis”, in Shahid Jusuf, Simon Evenett, and Weiping Wu (eds.), Facets of Globalization: International and Local Dimensions of Development, Washington D.C.: The World Bank, 2001, pp. 57–77. 7 The Greater China Growth Triangle in the Asian Financial Crisis* 178 Pax Sinica There are several important aspects to the emergence of Greater China as a regional economic growth triangle in the past twenty years or so. First, economic integration within Greater China has taken place essentially by way of foreign direct investment (FDI) Áows from Hong Kong and Taiwan to mainland China, especially to Guangdong Province. It is associated with the continuous relocation of export-oriented manufacturing activities from both Hong Kong and Taiwan to take advantage of low land and labour costs available across the border from Hong Kong, and hence has resulted in what Hong Kong government statistics refer to as outward processing trade Áows to China. This is therefore a clear case of FDI and trade being “twin travellers”, whereby together with FDI, industrial materials such as machinery and equipment as well as semi-manufactures are shipped to the Chinese hinterland for export processing.1 Second, the processing trade covers a wide range of export manufactures. Some are often regarded as sunset industries; some are relatively new lines of production, but all are labour-intensive manufacturing undertakings. They include garments, clocks and watches, toys, games and sport requisites, electrical appliances, and video recorders. Taken together they represent the traditional backbone of light industry in Hong Kong and Taiwan and, in each case, since the 1960s, have been the single most important source of foreign exchange earnings and employment.2 Third, virtually all export commodities processed on behalf of Hong Kong and Taiwanese investors are shipped back to Hong Kong for re-export, as this represents the most direct and cost-saving transport route to Ànal overseas markets. In addition, under Taiwan’s “third country” rule (intended to avoid any direct contact with the mainland authorities), virtually all mainland-bound FDI and processing trade Áows have also been channelled through Hong Kong. Similarly, mainland Chinese exports to Taiwan, irrespective of the degree of control exercised by Taiwan in respect to commodity categories and quantities , also have to be routed via Hong Kong or elsewhere. Hong Kong therefore plays a pivotal role in linking Taiwan with the mainland Chinese economy. Fourth, since 1979, an increasing volume of Chinese exports has also been routed through Hong Kong to overseas destinations to take advantage of the international marketing expertise of Hong Kong and its highly efÀcient banking, Ànance, insurance, and telecommunications services, as well as its highly advanced shipping and port facilities (Hong Kong is the largest container port in the world). This is in addition to the huge quantity The Greater China Growth Triangle in the Asian Financial Crisis 179 of intermediate input supplies from various overseas countries en route to the mainland for export processing. Hong Kong...