Potential crises in China's economic development have been intermittently reported by Taiwan's media in recent years, but trumpeting China's prosperity remains the mainstream discourse in Taiwan. In particular, the fact that foreign capital pouring into China last year may exceed US$50 billion is viewed by many Taiwanese critics as strong evidence of its vigorous economy.
This continues to strengthen the discourse that Taiwan's future lies in China. But what is the real structure of foreign investments in China? What is the influence? Is China capable of continuing to attract foreign capital? Is the future of Taiwan's economy really in China?
Since Deng Xiaoping's (
But why is foreign investment on the rise again after 2001? It is not because the various indicators of China's economic systems have shown any progress, but primarily because China's WTO membership has brought the hope that China will further open its market. But given the long-term inflexibility of China's political and economic structures and the various problems which have emerged after WTO entry, it remains uncertain whether or not this new hope can stand the test of time.
Does an increase in the foreign capital absorbed by China mean the West has generally become optimistic about China? Which countries have contributed to China's growth? In the international rankings listed by the world-renowned World Economic Forum and the International Institute for Management Development (IMD) in Switzerland, China stands below 30th in both growth and national competitiveness. It not only lags far behind Taiwan, but also reveals various predicaments of a developing country.
The structure of foreign capital in China reveals that around 70 percent comes from ethnic Chinese companies, with more than 50 percent provided by Hong Kong. The capital from Western countries (the US and Europe), however, is less than 20 percent. In other words, it is the broadly defined ethnic Chinese communities that remained optimistic about China over the past decade. Meanwhile, most Western societies remain skeptical.
In addition to Hong Kong, another country that has played a key role in trumpeting China's good prospects is Taiwan. Taiwanese capital transferred into China directly or via third countries has exceeded 10 percent of China's foreign capital, making it the second biggest country investing there, next only to Hong Kong. Taiwan's annual GDP is only one thirty-fourth of the US' and one-sixteenth of Japan's. But Taiwan's China-bound capital exceeds that of these two big economies -- the US accounts for 8.2 percent and Japan 8.23 percent of foreign investments in China.
Furthermore, statistics show that Taiwan poured more than US$4 billion into China via open channels last year, setting a new record. If we add the money transferred covertly, Taiwan is a major factor contributing to the record-high foreign investments in China last year.
Statistics suggest that China is not exerting a magnetic pull on the international community. The idea that the "easterly wind has prevailed over the west" is far from the truth. To sell the idea that China has replaced the US to become the world's biggest attractor of foreign investment is tantamount to mixing apples and oranges. But China has undeniably become a magnet for ethnic Chinese capital. How does this affect China and the investors?
China's long-term development must rely on raising its productivity and expanding its domestic market. Even though foreign capital is a principle cause contributing to the constant growth of China's economy, it also strikes hard at the major state-run and rural businesses, making it impossible for China's own capital to lead the country's economic development.
Moreover, the invasion of foreign capital has resulted in a serious oversupply in China's numerous commodities that lack competitiveness, thereby throwing the domestic market into the doldrums. From a long-term point of view, only depending on the meager added value created by serving as the world's processing factory -- which is what China is now called -- is not enough to continue attracting foreign investments.
What are the advantages and disadvantages for those countries investing heavily in China? Take Hong Kong, the biggest investor in China, for example. International trade theory suggests that trade liberalization brings prosperity for two interacting countries, but Hong Kong provides a perfect opposite model. The tiny area is far ahead of China in terms of its systemic structure and productivity. In contrast, its essential costs are higher than those of China.
The opening up of the Chinese market has offered some Hong Kong capitalists a golden opportunity to expand their businesses. They closed down their manufacturing factories in Hong Kong and transferred money into China. After a decade, China is more prosperous thanks to Hong Kong. Some Hong Kong conglomerates have also become better off. But Hong Kong's numerous laborers and its key fixed factors instead have taken a turn for the worse. Unemployment soars while employees' salaries and real estate prices nosedive.
What's worse, according to estimates by the noted Hong Kong economist Zhang Wuchang (
The Hong Kong experience tells us that China has become prosperous due to foreign investments and that a handful of foreign enterprises do benefit from China, but a society with its capital hollowed out must pay an immense cost and face sliding economic prospects. Taiwan appears to be following Hong Kong's path. But can it avoid the misfortune descending on Hong Kong?
As management guru Michael Porter put it, Taiwanese businesses should not hastily embrace China merely for its cheap essential costs. On the contrary, Taiwan should stand up to challenges presented by the overall environment and be innovative in boosting its productivity. Apparently, Taiwan's future lies not in China, but in Taiwanese people's efforts.
Cheng Cheng-ping is an assistant professor of economics at Soochow University.
Translated by Jackie Lin
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