CROSS-STRAIT - UNILATERAL ECONOMIC LIBERALIZATION

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 001080 SIPDIS DEPT FOR EAP/TC DEPT PLEASE PASS AIT/W E.O. 12958: DECL: 03/11/2015 TAGS: ECON EINV EFIN TW CH SUBJECT: CROSS-STRAIT - UNILATERAL ECONOMIC LIBERALIZATION WILL SEND MESSAGE REF: A. TAIPEI 278 ¶B. TAIPEI 709 Classified By: AIT Director Douglas H. Paal, Reason 1.5 b/d Summary -------------- ¶1. (C) In the positive atmosphere following the Lunar New Year charter flights, recent moves by the Taiwan government have suggested that it was on the verge of further liberalization across a range of cross-Strait economic policy areas. These include the creation of an offshore dollar-denominated stock exchange aimed largely at Taiwan investors in the Mainland; legalization of investment in the PRC in more advanced semiconductor manufacturing, integrated circuit packaging and testing, small screen TFT-LCDs, and naptha crackers; as well as travel policy. The Anti-Secession Law appears to have temporarily put a halt to further progress in these areas. The speed with which progress resumes could help signal the degree of the Chen administration's commitment to pursuing a cross-Strait dialogue after passage of the Anti-Secession Law. End summary. Window for Progress -------------- ¶2. (U) The December 2004 Legislative Yuan election results, widely interpreted as a rejection of political extremism by the Taiwan electorate, and successful negotiation of Lunar New Year passenger charter flights created an atmosphere of optimism in cross-Strait relations. In recent weeks, several moves by the Taiwan government had suggested that there was potential for more real progress on a range of cross-Strait economic issues. In addition, to the competing proposals for expanding cross-Strait charter flights offered by both sides, the Taiwan government appears to have drawn closer to implementation of various unilateral economic liberalization measures. Areas for Improvement...Finance -------------- ¶3. (U) On February 14, Taiwan's Financial Supervisory Commission (FSC) announced plans to create a U.S. dollar-denominated offshore stock market that would allow Taiwan companies in the Mainland to list in a Taiwan market and avoid caps imposed by the Taiwan government on Mainland investment. Taiwan investors in the Mainland are eager for such opportunities. It would contribute to Taiwan's efforts to develop the financial sector and become a regional financial center. On February 24, the FSC revealed that it was nearing a decision to allow Chinese financial institutions to set up representative offices in Taiwan. In addition, Taiwan for months has had plans to implement a pilot Renminbi exchange program on Taiwan-controlled Kinmen Island just off the Mainland coast. ...Investment Policy -------------- ¶4. (C) As reported ref A, various Taiwan agencies had been actively considering proposals to loosen Taiwan's restrictions on semiconductor manufacturing investment in the PRC. Taiwan's largest semiconductor firm TSMC had been particularly vocal in advocating reform in this area. Controversy surrounding Taiwan semiconductor manufacturer UMC's close links to Mainland semiconductor firm He Jian had increased pressure from some segments of the public to liberalize the regulations that many accused UMC of circumventing. However, as reported ref B, TSU politicians recently used the threat of a rumored U.S. export control "downgrade" to pressure the Chen administration into maintaining current restrictions. Currently, Taiwan does not permit investment that involves manufacturing chips with a feature size finer than 0.25 microns. Our discussions with Ministry of Economic Affairs (MOEA) Investment Commission officials indicate that Taiwan has been looking at lowering this limit to the 0.18 micron level or possibly even lower. ¶5. (C) Other industries have also been targeted for liberalization. Many firms have expressed interest in investing in integrated circuit (IC) packaging and testing facilities, small-size TFT-LCDs, and naptha crackers. Taiwan has a strong position in the global packaging and testing market. Packaging and testing currently accounts for about 15 percent of Taiwan's semiconductor industry revenues. However, with the rapid growth of the semiconductor industry in the PRC, Taiwan firms that observe the Taiwan regulations are being left out of this key segment and foreign firms are taking advantage of opportunities in the Mainland. Similarly, Taiwan has demonstrated strong competitiveness in the TFT-LCD industry, and moving less advanced manufacturing technologies, such as small-size screens, to the Mainland would help Taiwan firms maintain an advantage. Mainland Affairs Council (MAC) contacts had indicated for months that Taiwan liberalization of IC packaging and testing and small TFT-LCDS panels was imminent. Investment in naptha crackers has been restricted to date because of the size of the investment required. However, Taiwan's petrochemical investment in the PRC has seen rapid growth and naptha crackers are a logical next step for Taiwan firms to expand their Mainland presence. ...and Travel -------------- ¶6. (U) The Bureau of Immigration announced on February 24 that tourists from the Mainland could visit Taiwan individually instead of only as part of a group tour. Other proposals exist for further expansion of tourism opportunities, including through the "mini-links" that connect the islands of Kinmen and Matsu with the Mainland, and relaxation of regulations governing travel to Taiwan by PRC employees of Taiwan and multinational firms. Hostage to the Anti-Secession Law -------------- ¶7. (C) The PRC's proposed Anti-Secession Law appears to have at least temporarily closed this window of opportunity for further cross-Strait economic liberalization. As Mainland Affairs Council (MAC) Senior Secretary Lee Li-Jane explained, proponents of liberalization continue to push MAC to further relax cross-Strait economic policies, but opponents of liberalization have ramped up their efforts and the pressure on MAC is intense right now. MAC contacts have been reluctant to discuss various specific proposals until the final text of the Anti-Secession Law is clear. Ministry of Economic Affairs Investment Commission Executive Secretary Huang Chin-tan told econoff that all investment liberalization plans are on hold now. He is hopeful that the delay won't be long. ¶8. (C) Chinese National Federation of Industries Deputy Secretary General Tsai Horng-ming predicts that the delay on SIPDIS cross-Strait economic liberalization measures will be brief. He pointed out to econoff that the attention span of the media is short and the public is forgetful. Institute for National Policy Research Executive Director Lo Chih-Cheng agreed that the delay for further unilateral liberalization as well as bilateral efforts such as charter flights could be very short. He emphasized that the duration will depend on the response of the Chen administration. If it is able to moderate its reaction and prevent a strong counter-response from the PRC, the two sides may avoid a vicious cycle that would wipe out the positive atmosphere of a month ago and force cross-Strait relations into a longer slump. Comment ) Taiwan's Message -------------- ¶9. (C) The momentum for improved cross-Strait relations in February was real. Taiwan's leadership must consider its next steps cautiously or risk squandering that momentum. The PRC's recent unilateral offer to move toward opening its market to Taiwan agricultural goods suggests that it wants to mitigate the harsh negative reaction to the Anti-Secession Law from the international community and offer positives incentives for dialogue even as it appears to draw a harder line. Similarly, unilateral economic liberalization measures on the part of Taiwan could play a more important role in the cross-Strait dialogue in the coming months. Consciously or not, the Taiwan government will send a message on its real intentions with regard to the cross-Strait relationship in the wake of the Anti-Secession Law by the speed with which it resumes implementation of some of these unilateral measures. If allowed to proceed with minimal delay, these types of measures would increase the credibility of the Chen administration's openness to enter a dialogue with the PRC, even if the heat of Taiwan's rhetoric rises. End comment. PAAL