Increasing economic integration between Hong Kong, Taiwan, and China means the 'China
factor' looms even larger. The economic fortunes of both Hong Kong and Taiwan will be
influenced more and more by the performance of the Chinese economy, and both must continue
to adjust to the rapidly changing environment in order to realize growth potential.
So far the wide cyclical fluctuations of the Chinese economy may have brought uncertainty, but
strong growth momentum has provided tremendous opportunities to both Hong Kong and Taiwan
to benefit from the massive scale of its industrial transformation. It will go on.
Hong Kong's ability to adapt and its excellent stock of human capital ensures that it will continue
to serve as the entrepôt, international financial centre, and main business gateway to China,
as well as being a major centre of leadership and management in a wide range of China-focused
manufacturing and other activities.
Direct trade flows across the Taiwan Straits creates some chance that Hong Kong will lose the
rents generated by existing political barriers. At the moment Hong Kong's role is fuelled by re-
exports from Taiwan to China and vice versa by Hong Kong. But diversion of this trade flow will
occur only gradually. The first round of 'direct' trade is likely to be that going at present through
underground channels. The more likely outcome of deregulation is that alternative opportunities
will arise.
New triangular flows of trade will substantially lift the total trade volume among the three
Chinese economies rather than resulting in trade diversion from Hong Kong. Reform and
decentralization in China have already meant progressively more, not less, demand for Hong
Kong services, assisting Hong Kong to restructure its economy to higher GNP per capital levels.
Key role of trade
East Asian-style growth in its early stages is led by rapid expansion of exports, especially of
goods that use its initially abundant labour intensively. China is still at this stage.
China's export structure has changed dramatically over the last decade. The share of
manufacturing products increased from 49% of total exports in 1985 to 85% in 1993. In the main
these have been of labour-intensive goods.
More advanced East Asian economies rely more heavily on expansion and increasing
sophistication of domestic demand. For them, trade expansion is important to support the
upgrading of industrial structure and incomes. Hong Kong and Taiwan were already on their way
down this path when China began to move.
Hong Kong-China
Hong Kong's domestic exports contain increasing proportions of outward processing to China.
Over the last few years, with the continued shift of its manufacturing base to China, re-exports
have increasingly dominated Hong Kong's total exports. As a share of total merchandise exports,
re-exports surged from 30.5% in 1980 to 64.9% in 1990 and rose further to 81% in 1994. While
re-exports have continued to expand rapidly, there has been some inevitable deceleration as the
base became larger in the 1990s.
As a share of total re-exports, re-exports from China to the rest of the world stood at about 58% in the 1990s, but the share of re-exports to China climbed from 26.8% in 1990 to 32.8% in 1994. Thus the share of inward and outward trade with China in total re-exports rose to 91% in 1994 from 85% in 1990.
TaiwanþChina
In an historic redirection of trade in 1995, Mainland China became a bigger market for Taiwan's
exports than the United States. Merchandise exports from Taiwan grew by more than 10% in
1994. Most of that growth was in sales of equipment, raw materials and semi-finished goods for
Taiwan-owned factories in China. Given the depth of political uncertainty between these two
Chinese economies, the pace of two-way trade growth in recent years has been staggering. In
1995 Taiwan's bilateral trade with Hong Kong/China rose 21% to US$25.9 billion (update).
Taiwan reports that near to 90% of its trade via Hong Kong is destined for the mainland.
Why hasn't the giant eaten them all up?
The Hong Kong economy continues to demonstrate its growth fundamentals: market-directed
investment is delivering continued structural change, rising wages and high-levels of employment
in comparison to other industrial nations. It has embraced the structural change that is the logical
implication of its own sustained growth, and of policy reform in neighbouring economies.
The re-specialization of Hong Kong in the international economy in response to the opportunities
created by an open China is proceeding rapidly. But adjustment is not without strains and
uncertaintiesþespecially in the labour market. Extraordinarily rapid growth in the Chinese
southern and eastern coastal provinces is already leading to labour shortages there, and to
movement of the frontier of simple manufacturing growth into the Chinese interior. China's
productive structural change is domestic as well as international.
Hong Kong has relied on business decisions and market forces to lead a radical re-specialization
in international trade. Structural change in Hong Kong has focused on the supply of business
leadership and high-value services to China's growth and integration into the world economy. So
far, the economy is taking the transition in its stride.
Taiwan has entered the income range where economic logic requires adjustment out of
technologically simple and labour-intensive production. It has been able to sustain economic
dynamism through acceptance of structural change, especially in relation to China, albeit with
some ambivalence, and in the face of domestic resistance.
The contribution of manufacturing to Hong Kong's GDP has fallen from 19.3% in 1989 to under
10% in 1995 and manufacturing employment continues to shrink (from 1.1 million in the mid-
1980s to 0.8 million in 1989, 0.5 million in 1993 and 0.4 million in 1994). Domestic exports
continue to stagnate (growth in volume terms in 1994 was -2.3%). The shift into mainland China
of the labour-intensive end of Hong Kong manufacturing is gradually extending up the hierarchy
of capital intensity and technological sophistication, allowing Hong Kong to apply its resources
more intensively to high-value services at the top end of manufacturing.
Re-exports contribute significantly to Hong Kong's GDP. Trade-related services, such as trade
loans, insurance, port shipment and legal services are linked to re-export trade, which continues
to grow strongly, but at a less dizzy pace (from a higher base) than in earlier years of China's
reforms and opening to the outside world. As Hong Kong becomes more affluent, private
consumption has been another source of demand propelling the economy. Per capita GNP for
Hong Kong citizens (running at over US$20,000) surpasses that in Australia and Britain.
Taiwan's story is even more amazing as its relations with China remain delicate. Economic
imperatives are binding the two economies together as never before. Past December the
Taiwanese voted for more of the same.
Taiwan's bid to stay competitive is reflected in the movement away from items that can be
manufactured more competitively by Taiwan-owned factories on the Chinese mainland (such as
textiles) towards the production of capital and production inputs for such factories. The industrial
sector accounted for less than 40% in 1995, compared with 46% in 1985: the share of
manufacturing in output has fallen to 30% from near 40% in 1985. Services are gaining strongly
(near 60% of output) fostered by private sector demand and by initiatives to develop financial
and business services capabilities.
The government has announced a plan to develop Taiwan into a regional operations centre, to
focus on upgrading existing facilities of industry, in communications, expansion of research and
development facilities of high-value products, headquarters/management units, personnel training
and technical support facilities. Shifting gears has made rising wages compatible with full
employment.
In past years unit labour costs have risen faster than productivity. But in the first half of 1994
labour costs grew more slowly than labour productivity and well below the inflation rate.
Consumer goods manufactures have shifted production mostly to China and elsewhere, but more
capital-intensive industries. especially computers have stayed due to the need for highly skilled
labour. Capital-intensive exports were 64.2% of exports in 1994. Labour-intensive exports had
fallen to 25.9% in 1994 from 46% in 1985.
Will integration sustain strong growth?
China will change and grow as much in the next as in the past decade. It will still be grappling
with the problems that derive from its immense size and diversity. Conventionally measured per
capita income will be about US$3200, with some tens of millions of Chinese in coastal cities
living at material standards not very different from the average for their compatriots in Taiwan
and Hong Kong. The coastal provinces will have moved out of simple labour-intensive activities,
the relocation of which will have brought rapid growth but not yet labour scarcity and rapidly
rising incomes to the populous centres of the Chinese inland.
Taiwan's per capita income will be in the middle of the current OECD membership, around
US$25,000, having undergone massive structural change that has given it a major leadership
position in mainland Chinese business. Hong Kong will do even better, its per capita income of
US$40,000 will be near to that of Japan.
Adjacent economiesþhow will they be affected?
The Asia Pacific Economics Group predicts East Asia, with about one-third of the world's
people, will account for around 40% of conventionally measured world GDP in ten years' time.
"We see no slowing down", they confirm. "India will be moving -þ Bangladesh and Pakistan
will be off the blocks."
The big story of the industrialization of East Asia is that it is proceeding more strongly than ever
in the mid-1990s. While Japan is undergoing rapid structural adjustment, slowing its own growth
for a while and losing press to the pace of change in Greater China, it is also opening
opportunities for others. Other high-income economies in East Asia are defying gravity by
growing strongly after they have caught up with incomes in some advanced economies. Growth
momentum is strong in the ASEAN economies with average growth lifting to 7.8% in
1994.
The best news of all is that rapid internationally-oriented growth is spreading to more and more
economies and regions in Asia. The new frontiers are the inland provinces of China and Vietnam.
Lining up with reforms are the Philippines, India, and Bangladesh.
Each new addition to the process makes it easier for others. Each new entrant expands the market
for others and helps to entrench support for policies that promote growth. This will take the
exciting process of the internationally oriented industrialization of East Asia well into the twenty-
first century.
Asia Pacific Profiles is available from:
The Asia Pacific Economics Group
The Australian National University
Fax: +61-6-2574538