Greater China

How leaders from the mainland, Hong Kong, and Taiwan are creating an integrated powerhouse

A decade ago, local farmers were baffled why the city of Shanghai had decided to extend the No. 2 subway line across the Huangpu River all the way to their township of Zhangjiang, at the time just a marshy expanse of rice fields and fish-filled canals. Many electronics experts, meanwhile, regarded official predictions that this site would become a high-tech park brimming with state-of-the-art semiconductor plants as laughable. The most likely investors, Taiwan's big chip manufacturers, were forbidden by their government from transferring such sophisticated facilities and technology to the mainland.

Yet with stunning speed, this vision is becoming reality. Last year, Semiconductor Manufacturing International Corp. (SMIC), headed by former Taiwanese chip executives, opened a $1.5 billion silicon wafer fabrication plant and SMIC is preparing to build another one. Right next door, a joint venture headed by Taiwanese electronics tycoon Winston Wong has opened another sophisticated wafer fab. Taiwan Semiconductor Manufacturing Co. (TSM ), the world's leading contract chipmaker, is planning a wafer fab nearby, too. These are among 70 electronics companies that now have facilities in the 25-square-kilometer zone, which also hosts research labs for companies such as Sun Microsystems (SUNW ), LG, and Sony (SNE ). A 400-researcher lab by General Electric is on the way. Indeed, predictions that Zhangjiang will someday rival Taiwan's renowned Hsinchu Science-Based Industrial Park no longer seem outlandish. "We are just at the initial stage," says Dai Haibo, CEO of the company that manages the zone. As more research labs arrive, "we will be like Hsinchu combined with Silicon Valley," says Dai, who expects Zhangjiang's workforce to swell tenfold, to 200,000, in a decade.

Zhangjiang is but one focal point of one of the biggest economic mergers in history--as profound as the integration of Europe or North America. The concept of a Greater China has been developing since the 1980s, with the mass influx of manufacturers from Hong Kong, and then Taiwan, to the southern China coast soon after Beijing opened its doors. But in the past year, with China's entry into the World Trade Organization, the industrial unification of the three economies has hit warp speed and is spreading deep into the mainland. Political barriers to investment in once-strategic industries such as semiconductors, oil, and banking are crumbling, infrastructure systems are fusing--and Hong Kong and Chinese officials are collaborating on regulatory affairs.

Clearly, Hu Jintao, who was just named General Secretary of China's Communist Party at Beijing's 16th Party Congress, inherits the stewardship of an economy that is vastly different from when Jiang Zemin took full control in 1997. At that point, China was just beginning to seriously whittle down the state sector. This is also an economy that is developing with less and less guidance from the center, and that often makes the tension-filled politics of Taiwan-China relations seem like a sideshow. Beijing is already starting to realize that its goal of absorbing Taiwan is best served by letting the process proceed--not by hurling threats against Taipei. "The general policy now is to be confident and patient," says Wang Yong, executive director of Beijing University's Center for International Political Economy Research. "We should let the forces of integration play a larger role in determining the shape of cross-Strait relations."

A few manifestations of this accelerated convergence:

-- In the past two years, the number of Taiwanese officially living on the mainland has swelled from 300,000 to 500,000. And some estimates run much higher. Several thousand Taiwanese students are pursuing degrees in China rather than at U.S. universities.

-- This year, China will overtake the U.S. as Taiwan's biggest export market. Within the next year or two, when approval for direct shipping and air links are expected, cross-Strait trade will surge even more.

-- China has passed Taiwan as the world's No. 3 maker of information-technology products. But many of the benefits flow to Taiwan companies, who control 70% of the output. China has overtaken Taiwan as a maker of desktop PCs, optical drives, and liquid crystal displays. The share of Taiwanese notebook PCs made in China has leaped from 4% to 30% since early 2001.

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By Dexter Roberts in Shanghai and Mark L. Clifford in Chongqing, with Bruce Einhorn in Taipei and Pete Engardio in New York

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