Opening up the markets

01 June 1995 00:00  [Source: APC]

The market is achieving rapidly what politics has taken ages to do - bringing China, Taiwan and Hong Kong closer. Alan Tyler reports.

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THE focus of economic relations between Taiwan, Hong Kong and China has until the past two years been very much on the investments made by Hong Kong and Taiwanese businessmen on the mainland, taking advantage of the relatively low cost land, labour and other resources available in China. Now, China's economic muscle is being brought to bear in Hong Kong and its economic influence is increasingly being felt in Taiwan.

China has built up substantial investments in Hong Kong's banking, property, manufacturing, transportation, construction and tourism sectors. The total number of mainland Chinese investments in Hong Kong has now topped 2000 with an aggregate investment of over US$25bn. According to the Hong Kong Chinese Enterprises Association, the market shares of mainland backed companies in the territory are already hugely influential: foreign trade, 22%; banking, 10% in terms of assets and 24% in terms of deposits; insurance, 20% in terms of total premiums; transport, 25%; and construction, 12%. In Hong Kong's industrial sector China is the third largest investor, accounting for some US$564m or 10.8% of the cumulative investment total.

Last year the Bank of China became Hong Kong's third note-issuing bank, after the Hong Kong Bank and the Standard Chartered. The BOC, together with its 12 affiliated banks with mainland connections, account for a quarter of the territory's total bank deposits. The BOC Group is actively expanding its retail banking and corporate finance services in Hong Kong. The group is now the second largest banking group in Hong Kong after the Hong Kong Bank.

Since 1993 the Chinese currency Yuan has been allowed to circulate freely in Hong Kong. Cashing in on the growing number of mainland tourists and businessmen visiting the territory, many department stores, restaurants and other shops now accept

The situation in Taiwan is very different due to the delicate political relations with China. Beijing regards Taiwan as a renegade province, while the authorities in Taipei believe, officially at least, they are the true government of China. Tension has eased however as economic realism prevails over political rhetoric, and the Taiwanese allow indirect trade or investment with the mainland. This mainly takes place using Hong Kong as a base to do business with China. Two-way Taiwan-China trade via Hong Kong increased by 13% to US$9.81bn in 1994.

Taiwan forecasts a GNP growth rate of 6.2% for 1995, compared with 6.1% for 1994. With a GNP/capita of US$12 000 it is one of the richest countries in Asia with only Japan and the city-economies of Singapore and Hong Kong doing better. Total trade is some $180bn with a trade surplus last year of $10bn. Taiwan's leaders endorsed a two-pronged economic strategy earlier this year. The first was to develop the island into an A-P operations centre providing high-end manufacturing, transport, financial and telecommunications services. The second is to prioritise the development of ten key industries, one of which is the chemical and pharmaceutical sector.

Hong Kong is prospering precisely due to its increasing links with China. The territory is a key entrepot for trade with China by the US, the EU, Japan, Taiwan and other Asia-Pacific nations. More than half of China's total exports are handled by Hong Kong and much of this product is the result of Hong Kong businesses' export-oriented manufacturing joint ventures, processing and assembling merchandise in southern China, particularly Guangdong and Fujian provinces.

However, there is a downside to economic integration. Since relations between Hong Kong and China are so close that economically the territory is now regarded virtually as part of China, difficulties on the mainland feed through to Hong Kong. The territory has an inflation problem like its huge neighbour, although with a rate of 11%, it is less severe. And last year its stock market declined by more than a third - the worst performance of any large market in the world - largely a reflection of political and economic uncertainties north of the border.

In the chemical sector Hong Kong is a bit part player in terms of production with only Dow and Hong Kong Petrochemicals having major capacity in the territory. But many Western chemical firms have their regional administrative HQs in Hong Kong.

By: Alan Tyler
+44 20 8652 3214

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