Chinese puzzles

By Andrew Stone

In July, Taiwan abruptly pulled the rug on a 50-year-old relationship. Instead of a simple - if unreal - policy that mainland China and Taiwan were "one China", President Lee Teng-hui unnerved the region by calling for "special state to state relations" across the Taiwan Strait.

The implication that Taiwan was a sovereign state had the Chinese dragon breathing fire, mixing invasion threats with boasts that Beijing possessed neutron bombs which could liquidate the Taiwanese while leaving their infrastructure intact.

Taipei's unexpected scuttling of the long-standing co-existence formula, while a long time coming, earned Mr Lee admiration at home and anger in China, with a military newspaper calling him a "criminal who will leave a stink for 1000 years."

Mr Lee, who steps down next year, wants to leave his ruling Kuomintang party in control of Taiwan, and some saw his incendiary phrase as a device to rally voters behind his successor.

Its immediate impact was to cast a pall over regular cross-strait talks which guide the China-Taiwan relationship. This delicate parley is usually handled by groups which tiptoe round the no-man's land of reunification by sticking to issues such as illegal immigration.

China was expected to raise the stakes this year by putting Taiwan's future return to the mainland on the agenda - an issue now spiked by Lee's declaration.

Beijing and Taipei have stared across a Cold War divide since Nationalist forces retreated to Taiwan from Mao Zedong's mainland Communist Army in 1949.

Missile batteries dot the southern Chinese coast, their payloads targeted at Taiwan 160km away.

China sparked the last crisis in 1996 when it lobbed rockets across the straits and provoked threats from the United States, which recognises Beijing while also promising to defend Taiwan.

Mr Lee was central to that dispute, making a landmark trip to the US which China saw as a move to pull Taiwan out of isolation.

Wary of its giant neighbour, Taiwan buys arms where it can and gets on with what it does best - making money, much of it from massive investments in the mainland.

The ruling elites of China and Taiwan refuse to meet in formal dialogue.

Countries lured by massive payments to recognise Taipei - even briefly, such as Papua New Guinea - incur China's wrath.

China flatly opposes Taiwan getting a United Nations seat. New Zealand was in hot water last year when the One China policy - which recognises Beijing as the sole Government of China - was tested after Taiwanese officials were granted diplomatic privileges in this country.

In the international arena, few political relationships are juggled as gingerly as that among the three Chinas, or "China Inc", as the economic powerhouses of China, Hong Kong and Taiwan have become in the last decade.

In Apec-speak, China is discussed in the plural. The heavyweight People's Republic of China sits at the Apec table with "Hong Kong, China". Taiwan, confusingly, is called "Chinese Taipei" to mollify Beijing.

China and Hong Kong show good table manners, particularly since the British colony was returned to the motherland two years ago.

But Beijing is uneasy with Taiwan as a guest. In April, the Chinese threw a fit over the unexpected presence of a senior Taiwanese delegate at a meeting in Christchurch - an incident which made New Zealand Apec planners blanch.

Apec is one of the few international groupings beside the Olympic movement to admit Taiwan. But Taiwan cannot send its top man to Apec summits and must be satisfied with the presence of a senior minister among the presidents and prime ministers.

But beyond the rhetoric lies a web of intersecting interests.

Just as Hong Kong and China are intimately entwined, so too are China and Taiwan.

Taiwan is central to Chinese nationalism and identity.

The people are Chinese, sharing common roots and the same dialect as Fujian, the nearest mainland province to Taiwan.

And while their political cultures have diverged, economic forces drive the neighbouring Chinas closer.

For Taiwanese entrepreneurs, China is irresistible. Attracted by cheap land and labour, and the juicy prospect of access to the huge mainland market, Taiwanese investment has poured into China for the last 10 years. An estimated 30,000 firms in Taiwan are licensed to do business on the mainland.

Shoe, textile, chemical and plastics firms and toy makers led the way, but increasingly Taiwan's sunrise electronics industry has staked a massive offshore presence, despite widely held views that China uses red tape and the tax laws to give its own investors a home ground advantage.

Taipei's Institute for Information Industry reports that, between 1995 and 1998, Taiwanese firms doubled their output of computer products from the mainland.

Leading firms such as Acer and Delta have built vast assembly lines in Guangdong and Jiangsu provinces.

Many follow the instructions of Stan Shih, founder of the Acer Group, Taiwan's leading computer maker. His advice on investing in China: "go big or go home."

Labour costs in China are just one tenth of those in Taiwan.

The present shakeout of state enterprises in China is putting millions more workers on the job market, pushing down the price of labour even further.

Together Hong Kong and Taiwan contribute the lion's share of investment in China. Depending on which figures are to be believed, Taiwan's investors last year ploughed as much as $US30 billion into China.

Part of that Taiwanese investment is direct, but an even bigger chunk is directed through Hong Kong subsidiaries.

The scale of this economic transfer is creating political headaches for Taipei. As investments on the mainland pile up, business is pressuring the Taiwanese Government to soften its stance towards Beijing.

Straws in the wind? Direct shipping services between Taiwan and the mainland have already begun, shortening a roundabout journey which for reasons of politics was routed through third countries.

The maritime links remain limited, and are under severe expansionary stress as trade grows.

On the aviation front, commercial forces have seen a similar relaxation of limits on scheduled flights.

The worry in Taipei is that China will fan business frustrations against the chafing restrictions of rules designed to protect national sovereignty.

This is testing Taiwanese unity behind its policy that China must first become democratic before reunification proceeds.

Beijing remains wedded to its "one China" policy and cherishes the hope that economic self-interest will foster a desire for reunification.

Scholars, politicians and commentators agree that Taiwan's investment shift makes it economically vulnerable to China. A counter view argues that the mainland investment boom will transform China into a modern consumer society, eroding the authority of its Communist rulers.

China likes to showcase Hong Kong as a model of the "one country, two systems" approach, where the dynamic former colony gets limited autonomy under Beijing's rule.

But Taiwan rejects the Hong Kong solution, and described its own presidential poll in 1996 as the first Chinese democratic leadership election in 5000 years.

Taiwan wants the second ballot, due next year, to signpost the way for the next 5000 years.