Flying Down to Taipei

The agreement between Taiwan and the mainland for a major increase in direct transport links has hardly come as a surprise but also underlines the depth of the difficulty the sides have in agreeing on fundamental issues. It also focuses attention on how Hong Kong could suffer from a shift of business – this is a zero sum not a win-win game in which Taiwan is the main winner and Hong Kong is the main loser.

The visit of mainland negotiators from the Association for Relations Across the Taiwan Strait was certainly an historical event. But the agreements on transport links and food- safety cooperation with Taiwan counterparts from the Straits Exchange Foundation was about the minimum that could have been expected given that President Ma Ying-jeou had been elected on a platform of closer ties, and that China’s policy of wooing Taiwan with economic carrots and soft words remains in place.

However demonstrations against the visit are the tip of an iceberg of doubts about how far the island should go in deepening its relations simply for economic reasons. Continuing popular skepticism in Taiwan about Beijing’s long term goals still makes progress on substantive political issues very difficult. The middle ground where elections are won still wants a status quo, implying the maximum level of independence with the minimum of worry.

Economically this agreement provides some benefits for Taiwan, perhaps worth US$200 million a year. But that is quite small in the overall context of Taiwan’s total economy or even of cross-strait trade and investment. More significant is the removal of restrictions on financial transactions and mainland investment in Taiwan. These are mostly issues which can be dealt with by the Taiwan government on its own. Change is happening there too and may pose a bigger challenge to Hong Kong than direct flights and shipping.

An increase in direct cross-straits charter flights from 36 to 108 a week, involving 21 mainland and eight Taiwan cities will make only a small dent in the need for transit via Hong Kong. At present there are some 700 flights a week between Taiwan and Hong Kong and even if there were total freedom of cross-strait flights the number would probably only fall by 60 percent. But Hong Kong will lose some business from Taiwan visitors and perhaps also some tourism as the number of mainlanders allowed to visit Taiwan is increased.

The opening of direct shipping links between mainland and Taiwan ports will reduce trans-shipment business in Hong Kong. Taiwan-mainland trade accounts for 9 percent of Hong Kong’s re-export by origin and 7 percent of container trans-shipment. The impact should not be exaggerated. Much air and sea business comes through Hong Kong because there are so many Taiwan-owned factories in the Pearl River Delta (PRD). But Hong Kong was already losing business to Shenzhen ports and could now lose some to Kaohsiung, which has been stagnating but may now see its trans-shipment business revived.

The cross-strait deal also comes at a time when Taiwanese and other foreign investment in the PRD is facing challenges of falling demand, a rising yuan, pollution controls and wage increases. Shoe, toy and other low-skill factories are moving inland or overseas. Meanwhile the main focus of Taiwan investment has shifted to the electronics industries in the Shanghai-Nanjing-Hangzhou area – which will also now benefit from direct access to the Taiwan high-tech hubs at Hsinchu and other locations close to Taipei’s airport.

On the financial front, there are movements afoot by Taiwan companies to enable their Hong Kong-listed entities which are invested in the mainland to return home, where their names are more familiar and could well enjoy higher ratings and better liquidity. Taiwan is even setting its sights on becoming an asset management centre for Great China. Only last week Taiwan’s Financial Services Commission ended a ban on local private equity funds investing in the mainland.

This will certainly keep some of Taiwan’s ample private sector liquidity being invested from Taipei rather than through Hong Kong, and may in time attract foreign investors in the mainland to do so through Taiwan vehicles. Although Taiwan lacks the legal and other professional background that is Hong Kong’s strength its businessmen links to the mainland are wider and go deeper than those of Hong Kong.

Despite obvious threats to its exports, at least in the short term, and losses by some of its banks from US debt instruments, Taiwan has come through the financial crisis relatively unscathed other than by a steep fall in the stock market. Its currency may look increasingly attractive compared with Hong Kong’s US dollar-pegged one.

None of this is likely to change Taiwan-Hong Kong-mainland dynamics overnight but the more direct links there are the more that Hong Kong will have to look for other business to replace what for decades has been a captive market for its transport and financial services industries.

China may even decide to slow cross-strait links if it sees that this is adding to Hong Kong’s already significant problems in coping with the global financial sector contraction and the pressures on PRD industries.