CROSS-STRAIT INVESTMENT SURGES 51.1

UNCLAS SECTION 01 OF 02 TAIPEI 001191 SIPDIS DEPARTMENT PASS AIT/W AND USTR DEPARTMENT FOR EAP/RSP/TC USTR FOR SCOTT KI USDOC FOR 4430/ITA/MAC/EAP TREASURY FOR OASIA - WISNER E.O. 12938: N/A TAGS: EINV ECON EFIN TW CH SUBJECT: CROSS-STRAIT INVESTMENT SURGES 51.1 PERCENT IN 2004 REF: 03 TAIPEI 3930 SUMMARY -------------- ¶1. Taiwan's investment in the PRC rose by 51.1 percent in 2004 accounting for 67 percent of overall outbound investment from the island according to statistics from the Ministry of Economic Affairs (MOEA). Both the number of investment projects and their average value increased. However, PRC data indicate that contracted investment -- dollars actually spent -- fell by 7.7 percent compared to ¶2003. Taiwan investors have concentrated by industry in specific regions in the PRC, especially in the Yangtze and Pearl River Deltas. These industrial clusters offer new opportunities for Taiwan firms, but at the same time they offer opportunities for PRC- owned firms to develop and become more competitive. End summary. China Takes 2/3 of Outward Investment -------------- ¶2. According to the Ministry of Economic Affairs (MOEA),Taiwan's approved mainland investment in 2004 rose sharply by 51.1 percent to USD 6.94 billion. This marked the highest percentage increase since 2000 and the third highest increase since MOEA began tracking the data in 1991. Despite continuing government efforts to encourage businesses to diversify the places where they invest, more than 67 percent of outward investment during the period went to Mainland China. Some officials and analysts believe a more accurate figure would be 75 percent because many Taiwan investments in the PRC pass through third areas like British Virgin Islands and British Cayman Islands to evade Taiwan government controls or Taiwan taxes. Cumulative MOEA approved investment in the PRC as of December 31, 2004 was up 20.2 percent to USD 41.3 billion from the 2003 yearend level of USD 34.3 billion. Bigger Investments and More of Them -------------- ¶3. The remarkable 51.1 percent increase in approved investment is due both to an increase in the number of projects approved and the higher average value of approved investments. Both broke new records with 2,004 projects approved and an average size of USD 3.46 million. Some of the firms approved for particularly large projects include Taiwan ;Semiconductor Manufacturing Company (TSMC) (USD 371 million),Hon Hai Precision (USD 68 million),AU Optoelectronics (USD 100 million, two projects),Hsin Ta Cement (USD 60 million) and Formosa Plastics (USD 69 million). PRC Data - More Contracted, Less Realized Investment -------------- -------------- ¶4. PRC investment data showed that although the contracted value of Taiwan's new mainland investment in 2004 grew, the value of realized investment -- dollars actually spent -- dropped for the year. According to PRC data, contracted investment rose more modestly than the MOEA approved data figures, with growth of 8.7 percent to USD 9.31 billion. For realized value, PRC figures show a drop of 7.7 percent from 2003 to USD 3.12 billion. The cumulative totals by contract value and realized value as of December 31, 2004, were USD 79.33 billion and USD 39.62 billion, respectively. The drop in realized investment could be explained by a number of different factors that may have encouraged Taiwan businesses to postpone planned investments. These include the PRC's tightened macroeconomic controls, uncertainly about the future of the Renminbi exchange rate, and persistent power shortages in the PRC. Industry Clustering -------------- ¶5. According to MOEA statistics, nearly 79 percent of Taiwan's mainland investment was made in the Pearl and Yangtze River Delta (including Shanghai metropolitan area). Over 56 percent of mainland investment was in electronics and electrical equipment (mainly IT hardware manufacturing),basic metals, plastic products and chemicals manufacturing. These figures only partially reflect the degree to which Taiwan's investment has clustered by industry in specific areas of the PRC. A recent survey by Chung-hua Institute for Economic Research (CIER),a leading economic research institute in Taiwan, underscored how Taiwan's investment in plastic-product manufacturing has concentrated in Guangdong to take advantage of a well- established supply chain. Electronics and electrical equipment manufacturers have also concentrated in Guangdong but are increasingly migrating to Jiangsu and Zhejiang. ¶6. Clustering has facilitated the development of local suppliers with the result that Taiwan investors increasingly rely on inputs produced in the PRC instead of importing those inputs from Taiwan. Appreciation of the New Taiwan Dollar may further encourage this trend. Taiwan's Minister of Economic Affairs Ho Mei-Yueh has argued that the PRC has used industrial clustering to encourage the development of PRC-owned IT firms and warns of increasing competition for Taiwan firms. As some observers point out, industrial clusters in the PRC offer Taiwan firms both the opportunity to take advantage of a favorable investment environment and the challenge of a rising new center for competition. ¶7. MOEA statistical data on approved cross-strait investment can be downloaded at http://2k3dmz2.moea.gov.tw/gnweb/english/e_ma in.aspx? Page=D at the link to "D-6 Approved Indirect Mainland Investment." PAAL