Successful businesspeople and investors, like gamblers, understand the importance of spreading risk. Ever since the mid-1980s, Taiwan enterprises setting up in Hong Kong did so knowing full well that the territory would be returned to Mainland China in 1997. Most express confidence in the future of what will soon be known as the Hong Kong Special Administrative Region (SAR), but as the handover nears, Taiwan’s relationship with the mainland has created some particular concerns for the island’s businesspeople with a stake in Hong Kong. What if cross-strait relations continue to degrade? What if Beijing restricts the operation of Taiwan businesses in Hong Kong? There are many such “what ifs.”
In 1990, the ROC government’s decision to ease bans on indirect trade and economic contacts with Mainland China resulted in a deluge of Taiwan enterprises heading to the PRC in search of lucrative business opportunities. But because Taiwan still prohibits direct investment and trade with the mainland, most economic exchanges between the two sides of the Taiwan Strait are channeled through Hong Kong. “The ‘indirect’ trade and investment policy means that Taiwan companies have to go through a third place before trading or making investments in the mainland,” explains Wu Chieh-ming (吳傑民), director of Far East Trade Service Inc. (FETSI), the Hong Kong representative office of the ROC’s Ministry of Economic Affairs (MOEA). “That’s where Hong Kong comes into the picture. Owing to its high efficiency as a transit port, sound legal environment, and internationalized banking and financial sector, it’s the number one choice for Taiwan companies doing business with Mainland China.”
The impending handover of Hong Kong to mainland Chinese control has not diminished the enthusiasm of Taiwan companies for setting up operations there. Official statistics show that Hong Kong is currently the third largest recipient of Taiwan’s overseas investment, after the United States and Malaysia. All Taiwan companies seeking to invest in Hong Kong are technically required to receive approval from the ROC government, but available statistics imply that investors who adhere to this policy are very much in the minority.
According to the MOEA’s Investment Commission, in the period from 1958 to May 1996, the ROC government approved 353 applications, with a total value of over US$720 million, from Taiwan companies wishing to invest in Hong Kong. By contrast, FETSI estimates that there are over three thousand businesses with Taiwan owners or investors operating in Hong Kong, and that total investment from Taiwan in the territory exceeds US$4 billion. “That figure is still a long way from reality,” says Wu. “If you include ‘shell’ companies, and the money funneled through them, the number would be more than ten thousand, with total investment in excess of US$10 billion.”
Import-export statistics are a better indicator of the extent of Taiwan’s trade relations with Hong Kong. In 1995, bilateral trade reached US$26.1 billion, with a trade balance of US$20 billion in Taiwan’s favor. Hong Kong has now become Taiwan’s fastest growing export market. The bulk of this economic activity represents indirect trade between Taiwan and the mainland.
Hong Kong's stock exchange offers securities firms less restricted access to more global markets than is available in Taiwan.
For most Taiwan businesses operating in Hong Kong, things are going well, and they claim to have no plans to withdraw from the territory after the handover. They are, however, examining ways to manage the risks they may face under the future SAR government.
To invest and conduct business in the mainland, Asia Frozen Foods Corporation, one of Taiwan’s leading frozen vegetable processing and trading companies, established Asia Foods (HK) Ltd. in March 1990. Sophia Lin (林青樺), manager of Asia Foods (HK) Ltd., explains that there were two main reasons for establishing the Hong Kong operation. “First of all, ROC policy only allows indirect investment in the mainland from Taiwan, and we wanted to play by the rules,” she says. “Second, Hong Kong’s well-developed transportation infrastructure and banking system make handling shipping and financial activities more efficient and more reliable than in the mainland. The PRC also maintains many restrictive regulations concerning the flow of capital, which is another reason why we prefer to handle all our financial activities here. Overall, Hong Kong is the best place from which to manage our activities in Mainland China.”
Asia Frozen Foods Corp. first began its mainland operations in 1988, with the establishment of a joint-venture factory in Xiamen, Fujian Province. Two years later, when Asia Foods (HK)Ltd. was set up, the joint-venture factory became its wholly-owned subsidiary. Although the corporation maintains its headquarters in Taiwan, its center of production has shifted to the mainland, where it runs six wholly-owned factories and two joint ventures, the production and revenues of which have surpassed those of its factories in Taiwan. However, all shipping, administration, finance, and accounting activities for the mainland factories are managed out of Hong Kong.
Will the company’s operations be affected by the return of Hong Kong to mainland Chinese control? Yes and no, according to Lin. “It will have little effect on our mainland operations,” she says “But our Hong Kong company will no longer be considered a foreign company, and will instead be considered a mainland-registered company, as of July 1, 1997.” This is a source of concern to Lin, who worries that if tensions worsen between Beijing and Taipei, Taiwan companies operating in the Hong Kong SAR might become political bargaining chips, or even hostages.
After consulting accountants and lawyers, Asia Foods (HK) Ltd. ultimately decided to establish a holding company in the Cook Islands [in the South Pacific]. “Taxes were an important factor in our decision,” explains Lin. “Although Hong Kong currently imposes a corporate tax of 18 percent, we can’t be sure that the new SAR government won’t increase taxes. But the main reason was to minimize our exposure to risk after the handover. Under the SAR government, we would no longer enjoy the kind of protection from Beijing that we enjoyed under the British administration. Registering our company elsewhere is a way of hedging our bets.” The company is also considering opening factories and investing in Vietnam, where labor is cheap and there is little chance of operations being disrupted by the vagaries of cross-strait relations.
Taiwan companies often cannot get financing even from Hong Kong's leading banks. That leaves a profitable niche for Taiwanese financial institutions.
Taiwan’s leading furniture manufacturer, UB Group, decided to establish a joint venture in Hong Kong at the lowest point of public confidence in the future of the territory—shortly after the June 4, 1989 Tiananmen Square massacre in Beijing. If nothing else, real-estate prices were cheap. The company purchased a 12,600-square-foot show room and a 1,500-square-foot apartment in the high-rent district of Causeway Bay, on Hong Kong Island. UB Office Systems (HK)Ltd. was set up in May 1990, selling furniture made by UB Group’s Taiwan factory, as well as American and European brands.
The move into Hong Kong was the first step in UB Group’s overseas expansion. “Setting up a company in Hong Kong at that time was seen a bold move by many people,” says Levin Liu (劉建軍), assistant general manager of UB’s Hong Kong company. “But we did our homework, and it was clearly the best choice. Hong Kong’s business environment, transportation infrastructure, and efficient shipping and customs services gave us the edge we needed to build up our international business and image.” Meanwhile, UB Group has also established manufacturing facilities in both Singapore and Thailand.
Liu agrees that the shadow of 1997 is affecting all businesses in Hong Kong, including his. Real-estate prices are stagnant, and growth of high-end furniture sales has slowed. But a growing demand for UB Group’s practical and affordable lines of furniture has offset the overall decline in the company’s business. “Nobody can be sure what will happen to Hong Kong after 1997,” says Liu. “Most people have a wait-and-see attitude, and many are looking only at short-term planning and investment. Practical and economical products are well suited to a society in transition, like Hong Kong. That’s good for our business. Luxury goods don’t have many buyers these days.” Liu believe this conservative consumer mentality will last for at least several years after the transition.
As that transition approaches, UB Group is launching the second stage of its overseas expansion program—the establishment of manufacturing facilities in Mainland China. In late 1995, the company purchased a large parcel of land in the Kunshan Industrial Park, near Shanghai. It began construction of five factories and a warehouse in early 1996. The plants are scheduled to commence operations in 1997. “People are wondering why, on the eve of Hong Kong’s transfer to mainland control, we have made this US$22 million investment,” says Liu. “Again, the fact is that we’ve done our research. We started looking at the feasibility of the venture in 1991, and we were pretty sure that this was the way to go. But just to be certain, our board of directors delayed the final decision until late 1995.”
Liu emphasizes that his company’s mainland investment is a business decision based on realistic considerations. “For a corporation to survive, it has to keep investing, looking for new markets and cheaper manufacturing bases,” he says. “So where do we look? We look at lowcost, developing nations. There are a number of possibilities in the region, but for Taiwan investors, Mainland China offers the advantages of common culture and language. It’s far from a low-risk area, given its political and judicial systems, but nothing ventured, nothing gained, as they say. We’re willing to take our chances.”
Opportunities abound in Asia, but for investors from Taiwan, Hong Kong, and mainland China, common culture and language are important considerations
UB Group has decided to carry on with business as usual in both its Hong Kong and mainland operations for the time being. It has neither switched its company registration, nor altered its business development strategy. “Of course people are confident when they have something to fall back on,” says Liu. “We will continue our efforts in Hong Kong and Shanghai, but we’ve paid no less attention to developing our operations in Singapore and Thailand. If things go wrong here or in the mainland, we still have other bases.”
National Securities Corp. (NSC) is one of Taiwan’s foremost securities firms. In April 1994 it established a joint venture with Lippo Securities of Hong Kong. The resulting company, NSC Securities (Asia)Ltd. (NSC (Asia)) became a member of the Hong Kong stock exchange in the same year. In the following year, after becoming an approved broker in Taiwan, NSC (Asia) expanded its operations to include the Taiwan stock exchange, and is currently looking into the potential of offering funding and corporate finance services for Taiwan companies operating in Mainland China.
NSC decided to use Hong Kong as its steppingstone for internationalization because Hong Kong’s stock exchange is the world’s fifth largest in terms of capitalization, and more than 600 securities firms are active in the market. The fact that the world’s top ten securities firms have all set up companies in Hong Kong is further proof of the market’s importance. “It’s a place to get firsthand information on any new products in the field,” says Feng Lei-ming (馮雷明), director of NSC (Asia). “It’s one of the few places where you can monitor and access the global securities market. And it’s a much freer environment than Taiwan, where there are too many restrictions on what you can and cannot do.”
Feng Lei-ming has faith that Hong Kong’s role as a major international financial center won’t be in danger after the territory returns to mainland Chinese control. He reasons that Mainland China needs to attract huge amounts of capital to fund its national and economic development, and that Hong Kong will continue to be its primary point of access to overseas financing. “In fact, I think Mainland China will be even more aggressive than the present Hong Kong government in preventing any deterioration of the market,” predicts Feng. “The number of mainland firms listed on the Hong Kong stock exchange is evidence of that.”
NSC (Asia) is one of fifteen Taiwan-invested securities firms presently operating in Hong Kong. All have entered the market during the past three years, and most provide services for Hong Kong clients investing in Taiwan, and Taiwan clients investing in Hong Kong and the mainland. Because the demand for such services continues to grow, even more Taiwan securities firms are opening offices in Hong Kong, despite the shadow of 1997.
A tram advertises securities, and a banner urges people to strive for democracy. Depending on which Hong Kong people value more, risks may arise for Taiwan companies.
“Unless, and this is extremely unlikely, cross-strait relations worsen to a point where Beijing prohibits Hong Kong companies from investing in Taiwan, one of our major sources of business, or decides to impose restrictions on foreign exchange, none of us will pull out of Hong Kong,” Feng Lei-ming says. “We wouldn’t have set up here in the first place if we thought we would have to leave before July 1997, or soon afterwards. We calculated the risks and the potential profits, and decided to come. And at this point, we’re still a pretty small fish in this market, so we don’t have a lot at stake.” The company has considered moving its registration offshore, but little serious evaluation has been undertaken, since re-registration is a simple procedure that can be executed very quickly.
Chang Hwa Commercial Bank is one of four Taiwan-based banks that have established a presence in Hong Kong. Its liaison office was set up in 1991, and upgraded to a branch office in late 1994. Like securities firms operating in the territory, these banks are targeting Taiwan businesspeople who wish to invest in the mainland. “Every Taiwan entrepreneur in the mainland needs financial services,” says Liu Chin-chao (劉青超), senior vice president and general manager of Chang Hwa’s Hong Kong branch. “They would love it if we could open branches in the mainland, but our government won’t allow it. So they have to rely on our services in Hong Kong. We’re filling a gap here. Hong Kong banks are unfamiliar with many Taiwan businesses, and are reluctant to provide loans or foreign exchange services to them, whereas we have branch offices all over Taiwan, and can easily do credit checks and assess the performance of Taiwan companies. That’s why we’re moving in.” Liu adds that over 90 percent of his clients are Taiwan enterprises active in the mainland.
The attitude prevalent among Taiwan bankers in Hong Kong is one of confidence. They believe that Mainland China needs Hong Kong to attract foreign capital to fuel the country’s development. “Mainland China’s financial environment is still quite poor,” explains Liu Chin-chao. “So it depends on Hong Kong to provide financial services to enterprises investing in the mainland. Hong Kong will be indispensable until Shanghai becomes an international financial center, which will probably take about twenty to thirty years.” Liu is cautious about sounding too optimistic about Hong Kong’s future, but he hopes that Beijing will take a rational approach to how it runs the future SAR. “From a Taiwanese point of view, I think Beijing should be careful about tinkering with Hong Kong,” he says. “This can be a model for eventual, peaceful reunification with Taiwan. If they blow it in Hong Kong, reunification will become more difficult.”
Just in case conditions do take a turn for the worse, Chang Hwa Bank and the other three Taiwan banks represented in Hong Kong are taking precautions. Liu refers to their common strategy as “short-term management.” They rent office space instead of buying it; place clients’ Hong Kong dollar deposits in British banks, and US dollars in American banks; and they borrow money from other banks at low interest rates, lend it to clients at higher rates, and earn the difference. “The principle is to have more debts than assets,” Liu says. “That way, if Beijing decides to confiscate our property, we have nothing to lose except our computers and furniture.” He adds that his bank neither offers long-term financing, nor has a long-term development strategy for Hong Kong.
No one can truly predict the fate of Hong Kong’s business and economic environment after July 1997. So the bottom line for Taiwan businesses in Hong Kong, with the handover less than a year away, is to make hay while the sun still shines, but be prepared for rain.