China's New Taiwan Tack

One move is to lean on Taiwanese executives close to Chen

The prospect must drive Taiwan President Chen Shui-bian batty. What if the long struggle to preserve Taiwan's tenuous independence from China were scuttled not by a military confrontation but by a thundering herd of Taiwanese businessmen tripping over each other to pump more billions into mainland plants for making chips and liquid-crystal displays? It's not a far-fetched worry. Taiwanese companies have invested some $100 billion in the mainland over the past two decades, and these days China buys three-quarters of Taiwan's exports. "China has won," says Christian Raubach, a principal with McKinsey & Co. in Taipei. "The people with the money have already decided that."

These days, few of the people with money support Chen's Democratic Progressive Party. In December a coalition led by the opposition Kuomintang (KMT) edged out the DPP in Parliamentary elections. One reason for the KMT's strength: The pro-business party is far more interested in protecting the mainland economic interests of Taiwanese companies than in provoking Beijing. While the DPP has taken steps toward independence -- without ever calling for it directly -- the KMT has cozied up to China, abandoning its decades-old policy of hostility to the mainland. The culmination of that policy shift was KMT Chairman Lien Chan's visit to the mainland and historic meeting with President Hu Jintao. Though no concrete agreements came out of the April visit, it signaled the eagerness of both the Chinese and the KMT to isolate Chen as an extremist on the question of reunification. "If Taiwan keeps a closed mentality, we are quite likely to suffer a serious negative impact," Lien said at a luncheon for Taiwanese business execs in Shanghai.

To stay in the game, Chen quickly shot back with a call for talks with China. And he dispatched an emissary to Beijing with a message for Hu. But until very recently Chen has pursued a hard line on China and any Taiwan business that got too close to Beijing. On Apr. 13, his Cabinet approved a draft law that would raise the penalties for companies that transfer to China sensitive technologies, such as those used to make the newest computer chips. In February, prosecutors raided Taiwan's United Microelectronics Co. (UMC ), accusing the company of illegally providing management advice and investments to Chinese chip foundry He Jian Technology Corp., which was launched by UMC staffers back in 2001. On Apr. 20 the government fined UMC Chairman Robert H.C. Tsao $90,000 for hiding his company's ties to He Jian. Tsao has denied the charges, and now UMC is seeking a 15% stake in He Jian.

Beijing, meanwhile, is playing its hand masterfully. One tactic is to lean on Taiwanese executives seen as too close to Chen, and favor those who are more open to Beijing. Consider the remarkable about-face of Hsu Wen-long, the founder of the Chi Mei Group and a longtime Chen supporter. Chi Mei owns a plastics plant in China but wants to expand into liquid-crystal display distribution and assembly on the mainland. On Mar. 26, Hsu shocked Taiwan by publishing a letter in a Taipei newspaper criticizing Chen and warning that any Taiwanese quest for independence was a recipe for disaster. Chi Mei declined to make Hsu available to comment on the letter. But Joseph Wu, chairman of the government's Mainland Affairs Council, says Beijing threatened Hsu with investment restrictions and nonstop regulatory scrutiny of his mainland operations. "They applied a lot of pressure," he says.

There's the rub: Taiwan needs China to prosper, but China wants something in return from those who make money on the mainland. Much as it brought Hong Kong's tycoons into its camp before the British colony was returned to Chinese control, Beijing can put the squeeze on Taiwan's industrialists to steer clear of showing any support for independence. "If we were to achieve independence with the blessing of China, I would support it," says KMT Vice-Chairman P.K. Chiang, "but that is absolutely impossible. It's impossible to restrict the flow of money."

It may be a long time -- if ever -- before Beijing becomes Taiwan's political master. Taiwan's army is roughly on a par with China's, and the U.S. has vowed to intervene in the event of a conflict. But in the end, alliances and calculations of military might may not matter. For the true picture of what's happening in this controversy, forget the rhetoric from both sides and just follow the money.

By Brian Bremner in Hong Kong and Matt Kovac in Taipei

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