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By Yongnian Zheng

Creating a South China Common Market to Address Hong Kong and Taiwan Issues

Aug. 18, 2016  |     |  0 comments


The creation of a South China Common Market would symbolize a more open attitude from China, represent the progress of its opening-up policies, and offer an innovative solution to the development dilemma faced by the international community. It would not only enhance the international competitiveness of China’s economy, but also create a social and economic environment to solve the Hong Kong and Taiwan issues, and eventually achieve national unity in the long run.

 

The South China Common Market would encompass eleven cities around the Zhujiang Bay Area, namely Guangzhou, Shenzhen, Dongguan, Zhuhai, Foshan, Jiangmen, Huizhou, Zhongshan, Zhaoqing, Hong Kong, and Macau. In terms of economic aggregate, this is a major region in the world with a high level of economic development. It has a GDP of USD 1.3 trillion, twice of that of the San Francisco Bay Area and close to that of the New York Bay Area. And the value of its foreign trade totals USD 1.5 trillion, three times more than that of the Tokyo Bay Area. At present, this region has attracted 70 out of the world’s top 100 banks. With the Hong Kong Exchanges and Clearing Limited and the Shenzhen Stock Exchange playing significant roles in fundraising, the region has become the largest financial center in the world by market capitalization of listed companies. In addition, this region is an important transport hub, with its ports handling more than 72 million 20-foot-long containers, 5.5 times of the sum of the world’s three major bay areas.

 

Although the Chinese economy in recent years has entered a new phase known as the “new normal,” development will continue to be the cardinal principle. Historically speaking, in any country it is inevitable for the growth rate to drop from double digits to a medium rate. No country can sustain high growth forever. But the “new normal” does not mean that development is no longer important for China. Today, China faces many problems. As long as the economy is growing, these challenges will be developmental in nature, but once economic development goes wrong, problems will surface.

 

Looking back in history, social and political transitions (including democratization) are inevitable, but any peaceful and stable transition requires two essential preconditions, namely, the economic conditions and the model for social and political change. It is easy to notice that the democracy of low- and middle-income countries is often of poor quality while that of high-income countries works just fine. China will not escape the fate of becoming a democracy of poor quality if it does not have a solid economic foundation. Equally important is a sound social and political model. The countries that became Western-style democracies by simply copying often lose the steam for economic development and experience political and social instability. The situation is even worse for those who refused to reform and were bad at learning from the successful experiences of other countries: it is impossible for them to grow into modernized nations. It implies that China will have to sustain its economic growth to become richer before it can become more democratic. To further its open door policy is an effective path for sustainable growth.

 

In the past few years, China has set up several new free trade zones in Guangdong, Shanghai, Fujian, and Tianjin. However, the development of these zones has fallen short of the expectations of the international community and China itself. In fact, voices skeptical of China’s opening-up policies have recently started to appear in the international community. Although there is a top-down design, the effect of the policies has been weakened by the lack of effective institutional arrangements and executive capacity for policy implementation.

 

Generally speaking, before the 18th National People’s Congress, China implemented three rounds of opening up policies, namely the establishment of the coastal special economic zones in the 1980s, the policies issued after Deng Xiaoping’s inspection trip to the southern cities in 1992, and the ones after China joined the World Trade Organization (WTO) in 2001.

 

Compared with the implementation of the previous policies, the execution of the current opening up policies is far from ideal. Why? It can be attributed to a number of factors. One of them is that these free trade zones are too homogeneous both within each zone and between them. The reason that the previous policies worked was the introduction of heterogeneous elements. In the 1980s, thanks to its close connection with Hong Kong, Shenzhen developed rapidly and stood out from all the other coastal economic zones. After the 1990s, China joined the WTO and took the initiative to carry out a series of institutional reforms, through which China brought in heterogeneous elements. As for the opening-up policies in recent years, many observers hold that these were only adjustments of the internal system rather than fundamental reforms.

 

China is likely to turn the situation around by constructing the South China Common Market (hereafter referred to as the Common Market). Compared with other free trade zones, the Common Market is characterized by strong heterogeneity. The Common Market, which includes the mainland China, Hong Kong SAR and Macau SAR, can realize the efficient allocation of economic resources as well as institutional (rule of law) and cultural resources. It will enable the spread of the influence of the two Special Administrative Regions’ international business environments, mature legal systems, and free and fair trading systems to the Pan-Pearl River Delta Region and the rest of the country, providing useful references for other cities to seek further internationalization, refine their legal environment, and become more market-oriented.

 

Hong Kong returned to China in 1997, but its development in recent years is not what many of us had expected. Many have been surprised by the so-called “independence forces” who have risen quickly. Though small in number, they cannot be underestimated. It will be difficult to stabilize the situation in Hong Kong in the long period of time to come. If they are handled improperly, the Hong Kong community will fall into a very unstable state. Beijing has realized the severity of the problem, and is therefore trying to enhance the governance of Hong Kong via a hands-on policy. But the fact is that the current approach is not very effective.

 

The situation in Taiwan is also worrying. It is fair to say that the power of the Kuomintang (KMT) is waning. The party is conducting reforms now, but reforms will only result in its further localization. However, if the KMT does not seek further localization, it will be difficult for the party to survive and develop. Meanwhile, the younger generations in Taiwan identify themselves less with China and the pro-independence force is no doubt expanding.

 


China can maximize the utilization of economic and social approaches and moderately adjust its own political system to solve the Hong Kong issue and even the Taiwan issue in the future.


 

The “one country two systems” model applied to Hong Kong was originally designed for Taiwan. However, the development of Hong Kong showed that this model is not sound enough to solve the problems and thus it holds little appeal for Taiwan. So what should China do? If China does not want to use force to resolve the Taiwan and Hong Kong issues, then a possible option is to construct a new regional system with Chinese characteristics for Hong Kong and Macau first and then gradually apply it to Taiwan. One can call this new regional system China’s internal “European Union.”

 

Over the years, China has made great efforts to promote economic integration with Hong Kong and Taiwan. However, great economic integration has led to widening income inequality within Hong Kong and Taiwan. Of course, this does not mean that economic integration is wrong. What has been wrong is the way that economic integration has been achieved. That means that the fruits of economic integration were caught by a handful of rich people and put the majority of society, particularly the youth, in a disadvantageous position. 

 

The construction of the Common Market will help solve these problems. It is too sensitive to try to solve the Hong Kong and Taiwan issues through political means and too irrational to resort to military alternatives. By constructing the Common Market, China can maximize the utilization of economic and social approaches and moderately adjust its own political system to solve the Hong Kong issue and even the Taiwan issue in the future.

 

How can the construction of the Common Market result in the establishment of a new regional system with Chinese characteristics? This question can be answered by referring to the European Union’s experience. Since its inception, the EU has gone through many difficulties but in general it has been moving towards social integration through economic integration. The problem faced by the EU now is how to integrate politically, because without political integration, it is difficult to reach a consensus among all the sovereigns once they run into difficulties. However, this situation will not happen in the Common Market for China has the Central Government as the powerful coordinator. Constructing the Common Market can more effectively integrate Hong Kong SAR and Macau SAR into the national economic development landscape, creating a broader stage for the development of these two Special Administrative Regions while advancing their in-depth integration with the mainland of China.

 

Through the coordination of the Central Government, the cities of the Common Market can formulate a series of agreements — even market rules and applicable laws — for economic cooperation and integration. As with the EU, we can open the labor market and the service sector of the mainland China to Hong Kong SAR and Macao SAR to enable the unrestricted flow of labor. The problem of youth unemployment can be solved if the labor force from the two Special Administrative Regions is allowed to work in the Common Market. The cities in the Common Market can also co-ordinate their housing policies to enable young people who cannot afford housing in Hong Kong SAR and Macau SAR to purchase a house in any city of the Common Market. They can even coordinate their land policies so that the land can be leased or transferred for housing construction. For the mainland China, to introduce the labor force from the two Special Administrative Regions will bring its services to another level for they are more professional. Therefore, the free flow of labor will create a win-win situation. Given Hong Kong SAR may have some concerns at the initial stage, China can open its markets unilaterally. By doing so, the mainland can draw innovative young people from Hong Kong SAR to work in the mainland and give full play to their creativity. Due to its huge size, it will not be difficult for China to absorb negative impacts associated with unilateralism.

 

Furthermore, the Common Market can be built into a world-class platform for trade and investment and can rival the United States at the international level. Since its accession to the WTO, China has reaped huge economic benefits and gained importance within the organization. The United States attempted to constrain China through the WTO and to completely subject China to the rules of the US-led world economy. But the United States failed to foresee how resolved and capable China was going to be in reforming the WTO. After China joined the WTO, the United States gradually realized that the WTO would no longer help it write the rules of world trade. Therefore, the United States began to invent other vehicles, hence the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). President Obama made it very clear that the TPP was to prevent China from laying down the rules of world trade.

 

In this regard, the Common Market is of extraordinary significance for China. China cannot withdraw from international free trade. Free trade is not only an international economic practice conducive to the development of all countries, but is also part of international soft power that all modern countries have coveted. It had been dominated by Britain and taken over by the United States after World War II. The recent US-led TPP is targeted at China. Basically speaking, it seeks to push China out of the new club of global free trade. Although the Common Market is within China’s territory, there is no doubt that it can be built into an integrated, liberalized, well-regulated, and transparent international trade platform and a counterweight to the TPP. Furthermore, if the TPP does not come into effect due to opposition from inside the US political system, China can take over the flag of free trade. Today, debt, protectionism, refugees, and geopolitical factors have weakened the development momentum of the global economy. At this critical juncture, if China can become the flag-carrier of free trade, it will have a major impact on the global economy.

 

(This is originally a speech given by the author at a forum organized by the Guangdong Provincial Government on July 14, 2016.)

 

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