CROSS-STRAIT INVESTMENT KEEPS GROWING

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 003930

SIPDIS

DEPT FOR EAP/TC
DEPT PLEASE PASS AIT/W

E.O. 12958: DECL: 12/03/2014
TAGS: EINV ECON ETRD TW CH
SUBJECT: CROSS-STRAIT INVESTMENT KEEPS GROWING


Classified By: AIT Director Douglas H. Paal, Reason 1.5 D

Summary
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1. Taiwan investment in the PRC approved by Taiwan's
Ministry of Economic Affairs during the first six months of
2004 was 68 percent higher than the same period last year.
PRC data also shows a substantial increase in contracted
investment but a modest drop in realized investment.
High-tech firms lead the trend, but firms in heavy
industries, including steel and cement, are also investing in
the PRC. Taiwan investment is concentrated in the Pearl and
Yangtze River Deltas areas, with investment in the Yangtze
Delta region growing faster. Nevertheless, Taiwan's
restrictions on certain categories of investment continue to
hold back Taiwan firms in the high-tech industries where
Taiwan's advantage is strongest. End Summary.

Taiwan's Mainland Investment Continues to Grow
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2. (U) Recent statistics released by Taiwan's Ministry of
Economic Affairs (MOEA) show that Taiwan's investment in the
PRC continued to grow during the first half of 2004 at a
remarkable pace. MOEA approved USD 3.39 billion worth of
investment during the period. This represents a 68 percent
increase over the same period in 2003. Investment in
Mainland China accounted for at least 70 percent of Taiwan's
total foreign investment during the first half of the year.
Some officials estimate that up to 75 percent of Taiwan's
investment goes to the Mainland if money funneled through
offshore financial centers such as the Cayman Islands is
included. According to MOEA, Taiwan's cumulative investment
in the PRC increased 9.9 percent during the period to USD
37.7 billion. Most observers believe that a large portion of
Taiwan's investment in the Mainland evades MOEA approval.
Unofficial estimates of Taiwan's cumulative investment in the
PRC range as high as USD 190 billion.


3. (C) The PRC Ministry of Commerce's data for the first half
of the year as re-released by Taiwan's MOEA show a somewhat
different story. The PRC provides data on contracted and
realized investment. The total value of contracted
investment for the first six months of 2004 increased 31.6
percent to USD 4.66 billion. However, the value of realized
investment )- dollars actually spent -- declined 10 percent
compared to the same period in 2003 to USD 1.89 billion.
Taiwan MOEA's Investment Commission Executive Secretary Huang
Chin-tan speculated to AIT/T that the decline in realized
investment during the period was probably due to the PRC's
political pressure on "pro-green" investors who support Chen
Shui-bian's Democratic Progressive Party and the PRC's
macroeconomic control measures aimed at slowing China's
growth. Huang expects realized investment figures to show
growth again in 2005.

High Tech Industries Lead the Trend
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4. (U) High tech firms continued to dominate Mainland
investment during the first half of the year. According to
MOEA, electronics and electrical appliance manufacturing
accounted for just over 50 percent of Taiwan's investment in
the PRC. Several large-scale high tech investments made up a
particularly large portion of Mainland investment approved by
MOEA during the period. Taiwan Semiconductor Manufacturing
Company's (TSMC) plan to invest USD 371 million in an
eight-inch semiconductor foundry near Shanghai was approved.
In addition, MOEA authorized Hon Hai Precision, manufacturer
of a range of IT equipment and components, and TFT-LCD
producer AU Optronics to invest USD 57.4 million and USD 100
million respectively.


5. (C) Taiwan's heavy industry firms are also continuing to
invest in the Mainland. Together, investments in basic
metals and metal products, non-metallic minerals (including
cement),and chemicals accounted for 18 percent of approved
investment during the first half of 2004. Among the largest,
MOEA approved Formosa Chemicals and Fibre Corp.'s plan to
invest USD 48.3 million in a petrochemicals plant and Yieh
United Steel's plan to invest USD 51 million in a stainless
steel project. These results seem surprising given the PRC's
efforts to slow down its economy, in part aimed at the
construction industry. Even industries that would be most
susceptible to these economy-cooling measures have seen large
new investments. MOEA approved Taiwan Cement's plan to
invest USD 50.8 million in the first half of the year.
Furthermore, in the second half at least three additional
large-scale investments in the cement industry have also been
approved. MOEA's Huang told AIT that his office contacted
steel and cement industry investors and learned that the PRC
approved their investments despite efforts to slow the
economy because the projects would improve energy efficiency
in the PRC.

Taiwan's Investment in the PRC Moving North
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6. (U) Taiwan's investment in the Mainland is mostly
clustered in the Pearl and Yangtze River Delta areas.
However, the latest data from MOEA suggest that investment in
the Mainland is moving north. Whereas Guangdong and Fujian
provinces accounted for about 39 percent of investment
approved up through 2003, they made up only 25 percent of
investment approved during the first half of 2004. Jiangsu
and Zhejiang provinces together with the municipality of
Shanghai, on the other hand, accounted for more than 68
percent in the first six months of the year, compared to only
47 percent of cumulative investment through 2003. The
conventional wisdom is that Taiwan's high tech firms tend to
invest in the Yangtze River Delta area, while manufacturers
of other consumer goods, such as textile, toy, and shoe
manufacturers, tend to concentrate along the Pearl River in
cities like Shenzhen and Dongguan, Guangdong province.
MOEA's data bear this out. Approximately 75 percent of
Taiwan's approved investment in the electronics and
electrical appliance category was destined for the Yangtze
River Delta area during the first half of 2004.

Investment Policy Still Impedes Some Investment
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7. (C) Even as investment in the Mainland rises rapidly,
Taiwan's regulations continue to prevent some investment.
Taiwan's government has been considering for sometime lifting
investment bans for small TFT-LCD panel manufacturing,
integrated circuit (IC) packaging and testing, and trash
incineration. Pre-election politics have delayed approval of
these categories, but according to MAC officials, these
categories will be approved for investment around the end of
the year. Several firms have expressed interest to MOEA and
are ready to invest in these categories. Other categories,
notably large TFT-LCD panel and advanced semiconductor
manufacturing, remain prohibited with no sign that the Taiwan
government will lift restrictions in the near future.


8. (C) Taiwan is moving slowly to liberalize semiconductor
investment in the Mainland. It has already decided to allow
up to three firms to build eight-inch wafer semiconductor
foundries in the PRC. So far, only TSMC has been approved.
In addition, United Microelectronics Corp., Powerchip
Semiconductor Corp., ProMos Technologies Inc., and Nanya
Technology Corp. have all expressed interest in building
foundries in the Mainland. The Taiwan government still
prohibits investment in the Mainland in the more advanced
twelve-inch wafer technology. However, it has not succeeded
in keeping this technology out-of-reach for PRC
manufacturers. In September, the PRC's Semiconductor
Manufacturing International Corporation (SMIC) opened its
first twelve-inch wafer manufacturing facility in Beijing.
As reported in the media, Taiwan PC manufacturer Acer
Chairman Stan Shih argues in his new book "Millennium
Transformation: Change Management for New Acer" that it's too
late for Taiwan firms to dominate the PRC chip market. He
believes that had firms like TSMC been able to invest in the
Mainland sooner they would have been able to eliminate
competition from PRC-based firms. He believes that PRC firms
have now attained a level of technology that will make them
strong competitors. TSMC blames, at least in part,
industrial espionage for SMIC's success. TSMC has filed suit
against SMIC for patent and trade secret infringement with
the U.S. District Court for the Northern District of
California and the U.S. International Trade Commission. If
Taiwan continues to hold back the industries where its
competitive advantage is strongest -- like semiconductors --
it will face increasing competition from the PRC and other
countries and risks its own future growth
PAAL