China's open door extends to adversaries. New trade ties narrow gaps with Taiwan, South Korea, Indonesia

China's economic modernization is rapidly making Hong Kong the center of the mainland's covert trade with several of its long-standing political adversaries. Spurred by China's growing market for imports, South Korea, Taiwan, and Indonesia have all dramatically increased commercial contacts with China over the past year. None of the three has formal ties with Peking.

Now businesses in both Taiwan and South Korea are making their first direct investments on the mainland, according to diplomatic and industry sources here. Analysts view these commitments as the most substantial indications to date that the warming of Peking's relations with its estranged neighbors is unlikely to be reversed, as it has been in the past.

China is to regain sovereignty over Hong Kong in 1997. In the meantime, the colony is playing a key role in what amounts to Peking's economic diplomacy in Asia.

``Hong Kong is our window onto China,'' says J. S. Lee, a senior South Korean executive based here. ``We hope to increase our business with China by 20 to 30 percent this year.''

In effect, Peking is using trade to extend its influence in the region and to ensure the external stability it views as essential for its modernization efforts to succeed.

For instance, after years of trading through Hong Kong intermediaries, China and Indonesia consummated their first direct transaction in nearly two decades last year -- a $700,000 shipment of cashews to China's Guangdong Province, which borders Hong Kong.

Jakarta severed ties with Peking in 1967, accusing China of supporting a failed communist coup two years earlier. In April, the two countries agreed to establish trade liaison offices as a cautious next step in resuming commercial relations.

``There may be blips on the graph, but the momentum is unmistakable,'' says a Western diplomat here. ``There is little chance this trend will be interrupted.''

Two-way trade between South Korea and China rose by 130 percent last year, according to Hong Kong customs statistics, to $345 million. Diplomats here estimate total trade between the two nations at more than $600 million -- including unrecorded transactions through Hong Kong and a marked increase in direct shipments of bulk commodities such as oil, corn, and cotton.

The latter figure puts South Korea's China trade roughly on a par with France's.

Similarly, Taiwan's mainland trade via Hong Kongmore than doubled last year to $554 million. With the inclusion of direct shipments across the Taiwan straits, which separates the island republic from China, estimates of $850 million to one billion ``are not unrealistic,'' according to analysts here.

For both countries, China's growing appetite for consumer goods is proving a powerful attraction. Last year South Korea sold some 300,000 color television sets and refrigerators to the mainland, according to Korean executives.

Taiwan's exports are dominated by textiles and simple electronics items. But the island's burgeoning computer manufacturers, who now produce equipment for Chinese-speaking users, view the mainland as a natural market and potentially their largest sales market.

China's exports consist chiefly of raw materials and such items as yarns, fibers, and unfinished textiles. Although China is currently running a substantial deficit in its trade with Taiwan, these shipments have helped keep trade with South Korea roughly in balance.

Much of China's indirect trade is transacted through Hong Kong middlemen who gather orders from provincial officials or state-owned enterprises and then solicit bids among suppliers here.

Accordingly, most of South Korea's large conglomerates, such as Hyundai and Daewoo, maintain large branch offices here. These companies are now stepping beyond their trading relationships and making fixed investments on the mainland for the first time.

Daewoo and Lucky-Goldstar, another leading Korean company, are now completing plans to set up joint ventures in China's Fujian Province -- Daewoo for television and refrigerator plants and the Lucky group for an electronics factory.

The Seoul government is anxious to parlay such links into increased political contacts and, eventually, diplomatic relations in one form or another. But North Korean sensitivities are likely to limit the Peking-Seoul relationship.

Several years ago, for instance, China's trade with South Korea dropped dramatically when Kim Il Sung, North Korea's president, complained of it to Peking. Now North Korea -- long China's ally and Seoul's bitter political rival -- appears less likely to disrupt China's increasingly open ties with the South.

Peking views growing commercial ties with Taiwan as part of its long-term campaign to encourage rapprochement with the island's Kuomintang government.

Last year Peking assigned Fujian Province, which borders on the Taiwan Straits, a leading role in promoting two-way trade and investment. Taiwan businesses have so far launched two shoe plants there, one a joint venture and one wholly owned by the overseas investor.

Until now the Taipei government has ignored the surge in indirect trade with the mainland. But it appears increasingly concerned that local companies not grow overly dependent on orders from China.

It appears Taipei will insist that the island participate in the mainland's modernization only at arm's length.

Indonesia is similarly wary that its new trade links could draw it closer to China than it wants to be.

The Jakarta government continues to insist that China acknowledge a role in the 1965 coup attempt before diplomatic relations can be restored -- a step Peking is unlikely to take in the near future.