U.S. News & World Report

Taiwan's beachhead on the mainland

In 1661, a Chinese general loyal to the fallen Ming dynasty set sail with 900 warships from the South China port of Amoy and occupied the nearby island of Taiwan. Nearly 300 years later, in 1949, another defeated warrior named Chiang Kai-shek retreated to Taiwan, set up a regime-in-exile and vowed to return to retake all of China. D-day never came, but today, the Taiwanese are establishing a beachhead in Amoy, this time through trade and investment.

Amoy, now called Xiamen, is a city waking from a long sleep. Once, it was a flourishing port, open to traders from Europe and beyond. (The tea that was dumped into Boston harbor in 1773 was shipped by the English out of Amoy.) But for most of the past 40 years, Xiamen was immobilized by the fear of a Taiwanese invasion. Then in the early 1980s, when China started its economic reforms, Xiamen was named a special economic zone and began building the infrastructure to compete for foreign capital. In 1984, four intrepid entrepreneurs from Taiwan braved their government's ban on trade with the enemy to come to Xiamen. Four years later, the Taiwanese invasion began.

Some 300 companies from across the Taiwan Strait now have set up shop in Xiamen, 70 percent of them wholly owned by Taiwanese. The $ 300 million the Taiwanese have invested there (with an additional $ 500 million contracted for) is more than half of all Xiamen's foreign capital and more than half of all the Taiwanese money put into China over the past few years. All these investments, along with more than $ 3 billion a year in trade between Taiwan and the mainland, are still officially illegal. But the Taipei government colludes in the fiction that "indirect" deals through paper companies in third countries conform to the letter of the law. Indirect travel, through Hong Kong, has taken 1 million Taiwanese visitors to China, including some 200,000 to Xiamen.

The fit between Taiwan and Xiamen could not be closer. Although most of Taiwan's population emigrated from Xiamen or the surrounding province of Fujian more than 10 generations ago, the people still speak the same dialect and relish the same foods. They also watch the same television, since it takes only a $ 20 adapter to enable local sets to receive Taiwan broadcasts. Taiwanese businessmen know how to talk, toast and bribe their way through the Xiamen bureaucracy in a way not even a Hong Kong Chinese can match. And the local price is right: Wage rates are 5 to 10 percent of those in capitalist Taiwan, land costs are only 10 percent and construction costs are about a quarter of what they are in Taiwan.

Boom town. Most important, labor is freely available, even for manual work such as shoemaking and in polluting industries such as petrochemicals. In Taiwan, few people are willing to do dirty jobs any more, and environmentalists are fighting to keep out dirt-spewing plants. The result is a sea of scaffolding in Xiamen, as Taiwan-financed factories displace rice paddies and $ 300,000 villas crop up to house the managers from Taiwan who, while they may feel at home, cannot survive without their comforts.

Some of these comforts are making local leaders uneasy. Two weeks ago, as Xiamen's Communist bosses met to contemplate the city's future, police picked up 28 women waiting for customers in the leading waterfront hotel. "We are still learning how to deal with these things that are new to us," explained the city's vice mayor, Zhang Zhongxu, who first encountered urban decadence as China's consul general in Houston.

Zhang claims that Taiwan businessmen boost their earnings through land and currency speculation and that Taiwanese mobsters have moved into Xiamen; among their rackets is smuggling arms, drugs and teenage girls. Xiamen authorities are in daily telephone contact with police in Taiwan, who help them check credentials. Still, officials insist, the benefits that the Taiwanese bring greatly exceed the costs.

Unemployment in Xiamen is almost nil while it is rising fast in the rest of China. Taiwanese factories have created 20,000 new jobs. Local incomes average $ 500 a year, compared with a national average of $ 300, and are expected to double in five years. But Xiamen's future remains vulnerable to changing political winds, especially from Taiwan.

Taiwanese businessmen are pressing their government to allow direct transportation between island and mainland, which they reckon would lead to a doubling or tripling of trade. A Taiwanese entrepreneur is exploring the possibility of starting a private airline to run half-hour-long flights to Xiamen. There is less lobbying for legalizing trade and investment, which would cut the high profits that bold ban evaders now reap.

A fundamental question for Taiwan is whether booming Taiwanese trade and investment are softening up China for capitalism or making the Taiwan economy hostage to Beijing. But the biggest immediate issue is whether Taipei will try to block what could be the largest investment project on either side of the Taiwan Strait -- a petrochemical complex worth as much as $ 7 billion and composed of some 33 plants. The project, proposed by Taiwan's richest industrialist, Y. C. Wang, would employ a million construction workers over three years and provide 300,000 permanent jobs -- more than the city's current population.

Every day brings new reports on the status of the deal, but Vice Mayor Zhang, who learned about boom-and-bust in Texas, is philosophical. "If Wang comes, we'll develop faster; if he doesn't, we'll grow more stably." Xiamen isn't China's Houston yet, but if one petro-tycoon has his way, it could be.