CROSS-STRAIT INVESTMENT - STILL WAITING FOR THE

1. (C) Taiwan government plans to liberalize regulations on
investment in the Mainland continue to suffer delay.
Despite the recent announcement that Taiwan would modestly
relax investment capital ceilings, Mainland Affairs Council
(MAC) and Ministry of Economic Affairs (MOEA) Investment
Commission officials indicate that implementation will not
happen soon. According to these officials, approval of
investment in the semiconductor packaging and testing
industry and small-size TFT-LCD manufacturing will be
announced in the coming months, repeating predictions made
twice before this year. Restrictions on the level of
technology that Taiwan firms are permitted to use in
Mainland-based semiconductor manufacturing may suffer
additional political delays. However, efforts to improve
the enforcement of existing regulations continue. Further
investment liberalization appears to depend almost entirely
on Taiwan's domestic political environment and other
external events like the PRC's Anti-Secession Law. Many of
the economic, technology and security issues have already
been resolved. Taiwan firms will continue to suffer the
burden imposed by these regulations until an opportune
political moment arrives for liberalization. End summary.

Investment Ceilings - Premature Announcement


--------------------------





2. (U) On May 24, Taiwan media reported that Huang Chin-
tan, Director of Taiwan's Ministry of Economic Affairs
(MOEA) Investment Commission, had revealed plans under
consideration for modest relaxation of the limits on the
amount of capital Taiwan firms can invest in the PRC. As
reported ref C, The plan would allow any firm to invest up
to 40 percent of the firm's net worth in the PRC regardless
of the firm's size. Large Taiwan firms are now subject to
a sliding scale restriction of 20 to 40 percent of net
worth depending on the size of the firm. According to the
current regulations, large firms are allowed to invest up
to 40 percent of their net worth for the first NT$ 5
billion (USD 160 million); 30 percent of net worth between
NT$ 5 billion and NT$ 10 billion (USD 320 million); and 20
percent of net worth over NT$ 10 billion. Small and medium
enterprises are limited to investment of up to NT$ 80
million (about USD 2.5 million).



3. (SBU) Reports differ on how many firms might benefit
from this reform. Even different Taiwan government
agencies have varying estimates. IC's Huang told AIT/T
that only 30 firms listed on Taiwan' stock exchange have
reached or exceeded the investment limit and a few dozen
more were nearing the limit. Mainland Affairs Council
Economics Department Director Fu Don-cheng indicated that
130 firms had reached the ceiling. (Comment: Regardless of
which estimate is more accurate, AIT/T believes that this
small, incremental reform is unlikely to have a major
impact on Taiwan firms' ability to invest in the PRC.
Neither is it likely to increase the attractiveness of
Taiwan as a base for foreign firms wishing to manage
regional operations from a Taiwan subsidiary. End
comment.)



4. (C) Both Fu and Huang reported that the announcement was
premature. Huang denied that he had leaked the proposal
and blamed another government agency. He added that his
agency was initially reprimanded by Premier Hsieh's office
for revealing the proposal. He said that the Premier would
eventually make such an announcement when the timing was
right. Fu noted that the move would require several
supporting measures that would also need further
consideration. Among the supporting measures he mentioned
were changes in the investment review process, regulations
on technology control, and increased information-reporting
requirements for the investing firms. (Comment: The
supporting measures that Fu described seem excessive given
Taiwan's current regime and suggest that Fu strongly wished
to reduce expectations of quick movement on this
initiative. End comment.)
Industry Categories - Predicting Progress in Months...Again


--------------------------



--------------------------





5. (C) Taiwan continues to postpone expansion of the
industry categories approved for investment in the
Mainland. Long-awaited approval for investment in
semiconductor packaging and testing and the manufacture of
small-size TFT-LCD panels has been postponed once again.
As reported refs A and B, MAC's Fu told AIT/T in January
these two categories would be liberalized within the
following two months. In late-March, he indicated they
would be approved in late May. In a May 27 meeting he made
a similar prediction, saying that the two categories would
be approved within the next two to three months.
Similarly, IC's Huang predicted that semiconductor
packaging and testing would be approved by the end of June.
Small-size TFT-LCD liberalization would come sometime later
but before the end of the year.



6. (C) The potential for further liberalization of
semiconductor manufacturing is even less clear. Taiwan's
semiconductor firms have been pushing the government to
allow investment in more advanced manufacturing processes.
Currently, Taiwan firms are only permitted to invest in
manufacturing that produces semiconductors with feature
size no finer than 0.25 microns. Taiwan is considering
permitting investment at the 0.18-micron level. While IC's
Huang indicated to AIT/T that this would be formally
approved by the end of June, MAC's Fu would not speculate
on the timing. He emphasized that because it is such a
critical industry for Taiwan, political sensitivities would
continue to complicate liberalization. (Comment: Fu in his
position at MAC is likely to have a clearer picture of the
cross-Strait political implications that will impact this
decision than Huang in the more technical IC. End
comment.)

Effective Management - Working on It


--------------------------





7. (C) Econoff asked both Huang and Fu about progress in
the Taiwan government's efforts to strengthen the
"effective management" component in its overall "active
opening, effective management" strategy for cross-Strait
economic relations. Fu indicated that several Taiwan
agencies were engaged in this effort, trying to improve the
management of numerous aspects of cross-Strait relations,
such as stronger enforcement of investment restrictions,
improved monitoring of PRC visitors in Taiwan, and better
control of indirect cross-Strait transportation links. He
said that these agencies continue their efforts to enhance
the effective implementation of cross-Strait policies and
reduce violations.



8. (C) Huang agreed the Taiwan government, including his
agency, continued to seek ways to enhance these kinds of
enforcement measures. The IC is developing new evaluation
mechanisms to identify small Mainland investments by the
same firm that may cumulatively exceed total investment
restrictions. He also commented that some recent high-
profile investment investigations were a key component in
the effective management policy. According to Huang, the
investigation of United Microelectronics Corporation for
illegal investment in its Mainland competitor He Jian and
the IC's recent fine of Robert Chang, chairman of PRC
semiconductor foundry Semiconductor Manufacturing
International Corporation (SMIC), were examples of this
kind of action.

Comment - Always Waiting for the "Perfect Moment"


--------------------------



--------------------------





9. (C) AIT/T discussions with MAC and IC underscore the
fact that the Chen Administration is once again holding
back cross-Strait liberalization measures for that elusive
"perfect moment." Fu described in detail the string of
events that have pushed back liberalization in the last few
months including the PRC's passage of the Anti-Secession
Law and the Lien and Soong visits. He emphasized the need
for an internal Taiwan consensus on how to approach cross-
Strait economic issues. His comments and the repeated
delays highlight the fact that the Chen administration is
letting external events and political maneuvering
completely control the agenda on these liberalization
issues of critical importance to Taiwan's economy, or
perhaps simply blaming these factors for its political or
ideological unwillingness to improve cross-Strait economic
ties.



10. (C) Taiwan firms are paying the price for the delay.
This is most obvious with regard to the industry and
technology restrictions on investment. Semiconductor
manufacturers, packaging and testing firms and TFT-LCD
producers all face similar situations. PRC competitors are
growing, some Taiwan firms appear to be circumventing
regulations, and other foreign competitors are increasing
their presence in the Mainland. If these sectors are not
liberalized soon, Taiwan firms that observe the law will be
at a major disadvantage in competing with other world-class
manufacturers in establishing a base in the growing
Mainland market. These most recent conversations with Fu
and Huang reconfirm what Taiwan officials have been
suggesting for months - the technical aspects regarding
these measures have already been decided. The economic,
technology and security concerns have been resolved. The
measures are now only waiting for "a perfect political
moment." Unless that moment comes soon, it may not arrive
in time for Taiwan's businesses. Previous delays do not
encourage hope. End comment.
PAAL