The transformation is just as visible in Kunshan in Jiangsu province, a region that will soon surpass Taiwan in production of notebook PCs. Many of the 30,000 Taiwanese residents of Kunshan are buying homes in the city's vast villa complexes and sending their children to a Taiwanese-run school. Tree-lined Tinglin Road has so many Taiwanese-owned restaurants and clothing boutiques that locals refer to it as Taipei Road. Chang Hwa Commercial Bank Ltd. has just opened an office. Hundreds of Taiwanese companies--including Acer, Compal (CMPXF ), Hon Hai Precision Industry (HNHPF ), President Foods, and Nanya Plastics--have invested some $7.5 billion in the area.
While Taiwan is replicating its tech empire on the mainland, some of Hong Kong's pioneering companies are pushing much deeper into the interior. "Now, they are moving very dramatically into middle China, with western China as the next great push," says Michael L. Ducker, FedEx Corp.'s (FDX ) express international executive vice-president. To meet the shipping needs of Hong Kong and other companies, Ducker says FedEx plans to open offices in 100 new Chinese cities over the next five years. Besides developing Shanghai's Xintiandi district, for example, Vincent Lo has bought up cement plants in Chongqing and the neighboring provinces of Sichuan and Guizhou. In October, Lo led a delegation of more than two dozen businesspeople to look for opportunities in Chongqing.
Perhaps Hong Kong's most crucial role, though, is as Greater China's Wall Street. Bank of China is making its Hong Kong affiliate a laboratory for good banking practices in one of Asia's most sophisticated and well-regulated capital markets. The Industrial & Commercial Bank of China has set up a merchant-banking arm in the city.
China also is tapping Hong Kong government talent. Former top Hong Kong Securities & Futures Commission (SFC) official Laura M. Cha has taken a staff job in Beijing at the China Securities Regulatory Commission (CSRC). She is helping draft reforms that, among other things, will permit foreign investment in China's publicly traded state enterprises. Former Hong Kong SFC head Anthony Neoh is the CSRC's senior adviser and helped push through new proposals to allow foreign portfolio managers to buy Chinese stocks. "China needs Hong Kong because it can't manage its own pool of domestic savings," which is estimated at up to $500 billion, says Brookings Institution economist Nicholas Lardy. "This help in building China's financial infrastructure is hugely important."
Financial industries also are melding as Beijing gradually opens its banking sector to foreigners. Last December, Hongkong & Shanghai Bank bought a stake in Bank of Shanghai. And mainland-born Weijian Shan, who heads U.S.-based Newbridge Capital's office in Hong Kong, is leading negotiations to buy a stake in Shenzhen Development Bank Ltd. If the deal closes, Newbridge would be the first foreign institution to control a mainland bank.
In yet another sign of how integration is breaking down barriers, the banks of Taiwan and China are starting to commingle. In the past year, Beijing has allowed several Taiwan banks to open offices, while China's Shanghai Pudong Development Bank and Fujian Industrial Bank have applied to do business in Taiwan. Even major government-owned companies are starting to cooperate in ways unimaginable just a year ago. Taiwan's China Petroleum Corp. (SNP ) is jointly exploring for reserves with Beijing's China National Offshore Oil Corp., and Taiwan's China Airlines has just won approval to buy a stake in the mainland's China Cargo in anticipation of new business with the establishment of direct flights.
There are potential hazards to full-fledged economic integration. As Taiwanese and Hong Kong companies become more dependent on China for their manufacturing, components, engineering, and markets, they will become more vulnerable to a political or financial crisis there. Both remain distinct possibilities: China's banking system is in precarious shape, with an estimated $700 billion in bad loans. Millions of angry workers with scant pensions are losing their jobs at state-owned industries, and labor protests are breaking out across the mainland. "In a crisis, Chinese labor could become as destabilizing a force for the world economy as oil prices," says Ted Dean, managing director at information-technology consultant BDA (China) Ltd. in Beijing.
There also is the possibility that political tensions could once again sour Taiwan-China relations. It was only two years ago, after all, that China implied it was ready for war if Taipei didn't start seriously negotiating to rejoin the mainland. Taiwanese political leaders could provoke Beijing again by taking steps toward independence. As for Hong Kong, the worry is that the city's ineffective leadership will squander many of its advantages--a strong rule of law, good civil service, free media, and a tough anti-corruption stance--and blur the distinction with the mainland.
Still, there is a more encouraging way to view the Chinese convergence. As more and more citizens of Taiwan, Hong Kong, and China live, work, and study together, they increasingly will see themselves as part of one entity. This attitude clearly is discernible among the Taiwanese students who choose to study at Chinese universities. Taiwan-born Wang Jikang, 28, who is pursuing a master's degree in law at Shanghai's Fudan University, says he decided against a U.S. school because opportunities are brighter in China. Most of his Taiwanese classmates feel the same, he says. "Taiwan doesn't have an economic future outside the mainland," he adds. But because of Taiwan and Hong Kong, the mainland has a much brighter future as well, one that will be shaped increasingly by the best and brightest of all three regions working together.
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