The Taiwan Banker

On February 28, on the eve of the “Two Meetings” on the Chinese mainland, the Taiwan Affairs Office abruptly announced 31 preferential policies towards Taiwan, 12 of which involved accelerating equal treatment for Taiwan-invested companies, and the other 19 of which involved equal treatment for Taiwanese citizens. The degree, scope, and breadth of departments involved exceeded all expectations, opening up a new era for Chinese “economic and trade unification, integration, and development” for both businesses and individuals. A multifaceted opening: talent, industry, and capitalIn essence, these policies mark a transformation from “concessions from China to Taiwan” to “attracting Taiwan to the mainland.” Compared with 2008-2016, when Taiwan preferential policies mainly involved coming to Taiwan for purchasing, investment, and exchange, the new policies are oriented towards attracting Taiwanese talent, industry, and capital.First, for industrial opening, the biggest highlight is undoubtedly that China has taken the initiative to break down barriers to cross-strait trade in services, unilaterally opening up the sector to Taiwan, particularly vital sectors such as finance, government procurement, and film & TV, etc. China has decided to unilaterally skip over Taiwan’s service sector trade barriers, stating that “even if Taiwan doesn’t let me in, I still welcome you in,” allowing Taiwanese industries and citizens to grow in China.Taking the financial sector as an example, China will allow Taiwanese financial institutions and merchants to cooperate with UnionPay and Chinese non-bank payment services to provide convenient micro-payment services; Taiwanese credit agencies will be able to cooperate with their Chinese counterparts to provide credit services to people and businesses on both sides of the Strait; and Taiwan-invested banks will be able to cooperate with Chinese counterparts, providing financial services to the real economy through syndicated loans, etc. Moreover, for Taiwanese financial practitioners, it will relax professional qualifications for Taiwanese for securities, futures, and funds, accepting all kinds of Taiwanese financial certifications, the only requirement being an exam on mainland Chinese laws and regulations.Another bright spot for industry is equal treatment for Taiwanese-invested companies, including participation in the Made in China 2025 initiative on an equal footing with Chinese businesses, tax reductions for high-tech sectors, participation in project declarations for the national key R&D plan, participation in infrastructure construction (with a franchise model), fair participation in government procurement, participation in mixed-ownership reform for SOEs, and (for agricultural businesses) equal treatment and subsidies for machinery purchases.In addition, for the sensitive cultural industries, Taiwanese people are being granted special allowance to produce Chinese radio shows, TV programs, and movie dramas, without quantitative restrictions. China’s film publishers, radios and TV stations, A/V websites, and cable TV networks are seeking film and TV dramas produced in Taiwan, also without quantitative restrictions. Restrictions on percentage of creators, mainland Chinese elements, and investment ratio in cross-Strait films and TV series are being relaxed, and the approval process for Taiwanese book imports is being simplified, among many other items. This is undoubtedly a major boon for Taiwan’s long-stagnant film and TV industry.The more eye-catching policy is clearly travel permissions for Taiwanese citizens. “Gradually Providing Equal Treatment to Taiwanese Compatriots Studying, Starting Business, Working, and Living in Mainland China” includes the ability to become professionals of 53 types, and to participate in 81 professional qualification tests. Taiwanese citizens can also apply to participate in the Thousand Talents Program, declare various national fund projects, and obtain medical qualification and practice medicine in mainland China. Taiwanese doctors can obtain mainland qualifications through affirmation, and Taiwanese teachers are incentivized to work in mainland colleges, etc.Seeking a great quantity of talent, especially the younger generationIn fact, in recent years China has already launched strategies to attract Taiwanese talent: the current 31 preferential policies are only a summary. For example, Taiwanese high-tech professionals have long been head-hunted by Chinese companies at 2-5 times the salary – from panel manufacturers, to LEDs, DRAM chips, and wafers. Mainland companies even made special trips to Hsinchu Science Park and the Taipei 101 area, hiring expert Taiwanese head-hunters, already demonstrating a high degree of familiarity with Taiwanese high-tech and human resource trends.Since December 2016, when the Chinese central government announced the creation of 41 national green innovation bases and 12 green innovation demonstration zones in 20 provinces and cities, 1,200 Taiwanese-invested companies have already moved in, attracting over 6,000 young Taiwanese staff, and 17,000 internships. The bases provide financial incentives including start-up subsidies, office and plant subsidies, housing subsidies, medical services, and child education services, among others. More than 200 additional green innovation bases have also been set up by directly by local governments, and more are in progress.The 31 policies presently being announced comprehensively open many sectors, attracting Taiwanese capital, technology, businesses, talent, and even the transfer of whole industries. Taiwan must face up to this problem.In order to further develop cross-Strait integration, in January 2017, China announced that the card-style certificate for Taiwanese citizens would be changed into an 18-digit code identical to mainland IDs, allowing Taiwanese citizens to use e-commerce services. In February, Chairman of the CPPCC Yu Zhengsheng formally announced “Strengthening Exchanges with Taiwanese Grass-Roots and Youth, and Building a Solid Foundation for Cross-Strait Relations and Popular Will for Peaceful Development.” In July, the Ministry of Education announced that it would relax the test score criteria for Taiwanese students to study in China, from the previous “top standard” (top 12.5%) to the “average standard” (top 50％). In November, a new scholarship was announced for Taiwanese students (the old system was from 2006), increasing the total amount of funds released each year from ¥7,000,000 to ¥18,720,000 – a maximum of ¥8,000 per person per year, jumping to ¥30,000 in the third year. The number of approvals increased from 2,000 to 2,900 people.Taiwanese companies, led by Hon Hai, go publicOn March 8, immediately after the new policies were announced on February 28, the China Securities Regulatory Commission also accelerated the listing of Hon Hai’s subsidiary company Foxconn Industrial Internet (FII), taking only 36 days from application until approval, skipping more than 400 other companies in line, and setting the record for the fastest IPO application in mainland China. This quick offering, obviously directed by the Director of the National Taiwan Affairs Office Zhang Zhijun, will form a “Taiwan Business Share Class” in the Chinese stock market. The quick listing of FII is bound to create a model for Taiwanese listed companies. Hon Hai’s decision to go to China to list was obviously made in order to raise more money. In contrast to PE ratios up to 43 times given to Shanghai A-share technology stocks, Hon Hai only gets 11-12 times in the Taiwanese market – a difference of three times. FII issued a total of 1.9 billion shares, and is scheduled to raise ¥27.2 billion. If it can attain the PE valuation for tech A-shares on the Shanghai exchange of almost 43, its market value could approach ¥680 billion (about NT $3.1 trillion), not only becoming a leading Shanghai technology stock, but also exceeding the NT $1.5 trillion market cap of its Taiwan parent company.As early as June 25, 2015, Terry Gou stated at a shareholder’s meeting that “the P/E ratio of Taiwanese stocks is too low. I’m afraid we will be marginalized.” He planned to split off Hon Hai’s mainland investments within 3-5 years. In 2017, he honored his promise. In July, Foxconn Interconnect Technology listed in Hong Kong, and in October, the world’s second largest PCB manufacturer Zhen Ding also spun off Peng Ding, listed in Shenzhen. Foxconn has also now reorganized itself into FII, which listed in March 2018, a further milestone in its rebirth as a Chinese corporation.After the listing of FII in China, Hon Hai still holds 85％ equity, but since FII’s investment plans are all in China, whether it raises capital in the mainland, or together with a mainland or foreign-invested partner, it will further dilute Hon Hai’s stock. Once FII’s funds from China exceed those from Hon Hai, it will lose its dominance over FII.Knock-on effects from the cross-Strait capital gapThe cross-Strait capital market gap will not only impact Hon Hai’s dominance over FII, but will also lead to further departure of its talent. The cross-Strait gap in PE ratios will also be reflected in employee stock allotments. FII has a higher PE ratio than Hon Hai, which will enable its employees to enjoy higher allotments. Hon Hai employees will have more incentive to transfer to the mainland. With the rise of FII in China, the more than 4,000 R&D staff originally at Hon Hai will depart sooner or later.In this regard, FII’s listing in Shanghai should unfortunately not just be seen as a case of Taiwan businesses listing in the mainland. Because of Hon Hai and Foxconn’s important status on both sides of the Strait, the knock-on effects caused by the cross-Strait capital gap will include cross-Strait transfer of capital, technology, business, talent, and even whole industries. Hon Hai, as a leader of Taiwan’s IT and electronics industries, will eventually cause related industrial chains to follow.More seriously, industries associated with FII, ranging from intelligent manufacturing to IoT, robotics, and cloud computing platforms, not only conform to the mainland’s 13th Five Year Plan, but also overlap with the industrial upgrading being urgently promoted by Taiwan. If FII lists in Shanghai, eventually creating a drastic payout for Hon Hai, Taiwan‘s key companies will follow in its footsteps, eventually hollowing out Taiwan’s IT and electronics industries.It is no wonder that on March 6, Bloomberg wrote an article on FII’s listing in Shanghai entitled, “Foxconn's China Bounty Might be a Taiwan Headache.” The Nikkei even pointed out that China‘s posthaste approval of the listing was aimed at making the Taiwanese economy even more reliant upon China, bringing it that much closer to unification.Taiwan’s IT products and electronics account for 40% of its total export volume. If the cross-Strait capital market gap causes more businesses to follow FII, turning to the mainland to list spin-offs, human resources, technology, and businesses will eventually follow, and Taiwan may face an unprecedented industrial crisis.Looking at the cross-Strait game, this is the mainland’s new strategy towards Taiwan, following the frustration of the Sunflower Movement in 2014 of “full attraction and economic unification.” It hopes to balance the “natural independence” of Taiwan’s new generation by “contributing to gradual unification through cross-Strait integration and development.” It remains to be seen whether “Chinese economic unification,” or “recognition of Taiwan’s government,” will eventually become more prominent after the end of the cross-Strait rivalry.