CROSS-STRAIT ECONOMIC ROUNDUP - SECOND QUARTER

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 002950

SIPDIS

DEPT PASS TO AIT/W
DEPT FOR EAP/TC

E.O. 12958: DECL: 07/08/2020
TAGS: CH ECON EINV ETRD EWWT PREL TW
SUBJECT: CROSS-STRAIT ECONOMIC ROUNDUP - SECOND QUARTER

REF: A. A) TAIPEI 268


B. B) TAIPEI 1919

Classified By: DKEEGAN

Summary
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1. (U) During the second quarter of 2005, Taiwan
semiconductor manufacturer United Microelectronics
Corporation (UMC),which is under investigation for its
affiliation with PRC semiconductor firm He Jian, called on
the government to speed up its investigation into the case.
The Taiwan Provincial Farmers Association (TPFA) came under
criticism from the Mainland Affairs Council (MAC) for its
trip to the PRC to discuss fruit export issues. Cross-Strait
visitor exchanges showed some signs of slowing briefly after
the PRC,s passage of the Anti-Secession Law, but high
profile visits continued. Taiwan airlines expanded the use
of cross-Strait routes through South Korea. End summary.

Investment: UMC Case Update...
--------------


2. (U) United Microelectronics Corporation (UMC),which is
under investigation by the Hsinchu County Prosecutors for its
affiliation with PRC semiconductor manufacturer He Jian, ran
a large advertisement on June 22 in several Taiwan dailies
calling on the government to speed up its investigation into
the case and bring charges if any against the firm,s
management as quickly as possible. It also announced that
Chairman Robert Tsao would resign no later than 2007 or
earlier if he is convicted of crimes related to the He Jian
case. The announcement pointed out that UMC stockholders
approved He Jian,s proposal to give UMC a 15-percent stake
in the Mainland firm as compensation for &management
advice8 already provided. Therefore, according to UMC,
there should be no basis for allegations that UMC,s
management violated the interests of shareholders. In the
announcement, UMC also noted that Tsao would decline another
term as one of President Chen,s National Policy Advisors to
ensure that UMC,s case is handled without political
influence.


3. (C) Investment Commission Deputy Executive Secretary Emile
Chang (strictly protect) told AIT/T that the Commission has
the authority and evidence to fine UMC for the illegal
transfer of patents to the Mainland affiliate. However,
according to Chang, the Minister of Economic Affairs Ho
Mei-Yueh is looking for ways to help UMC resolve the legal
case without major sanctions. He said the Commission is
waiting for instructions from the Mainland Affairs Council
(MAC) on how to proceed. He claimed that MAC had been unable
to provide instructions because it was waiting for guidance
from Taiwan,s National Security Council (NSC). When asked,
AIT/T NSC contacts bristled at the notion that other agencies
were waiting for instructions from the NSC. They pointed out
that the case was a judicial matter and was being handled by
the Hsinchu Prosecutors Office.

Formosa Plastics Group Investigation...
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4. (U) In other investment-related developments during the
quarter, Taiwan press reported in late June that Formosa
Plastics Group,s (FPG) had begun construction on a RMB one
billion hospital in Xiamen. However, Taiwan,s Investment
Commission revealed that it had not received an application
for approval of the project as required under Taiwan law for
investment in PRC hospitals. The Investment Commission will
investigate the project and requested that FPG explain its
involvement.

CPC/CNOOC Cooperation...
--------------


5. (U) Taiwan,s China Petroleum Corp. on June 28 announced
plans to cooperate with the PRC,s China National Offshore
Oil Company (CNOOC) to explore oil fields around the northern
portion of the central line of the Taiwan Straits. A draft
of the cooperation pact was submitted to MOEA for approval.
In 2002, the two firms had cooperated in exploring oil fields
around the southern portion of the central line.
New Tsingtao Brewery in Taiwan
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6. (U) On June 13, Taiwan,s Sanyo Whisbih Group, the Taiwan
distributor for the PRC,s Tsingtao brand beer since 2002,
announced that its NT$ 3 billion (USD 93 million) Tsingtao
brewery in Taiwan was complete. This is the first brewery in
Taiwan to produce a Mainland brand beer. Tsingtao Beer has
become Taiwan,s second best selling beer after Taiwan Beer,
with a 12 percent market share. With the additional capacity
of the new brewery, the group hopes its market share will
increase to as high as 25 percent this year.

Trade: Fruit Exports and Dumping Investigations
-------------- ---


6. (U) The KMT-dominated Taiwan Provincial Farmer Association
(TPFA) sent a nine-member delegation led by Chairman Liu
Chuan-chung to the PRC on June 22. The group met with the
PRC,s Cross-strait Association on Trade Exchanges (CSATC) in
Beijing to discuss technical issues related to Taiwan fruit
exports, including certificates of origin, customs clearance
and quarantine procedures. The delegation told Taiwan press
and Taiwan,s Council on Agriculture that it did not sign any
agreement or reach any consensus with PRC interlocutors. The
Mainland Affairs Council (MAC) has stressed on more than one
occasion that the Taiwan External Trade Development Council
(TaiTRA),not TPFA, is the only agency authorized by the
Taiwan government to negotiate fruit export issues with the
PRC. On July 3, MAC issued a press release responding to PRC
press reports that TPFA and CSATC had reached a consensus on
fruit export issues. MAC pointed out that this would be a
violation of Taiwan law and called on TPFA to provide further
explanation.


7. (U) During the quarter, the PRC initiated two dumping
investigations aimed at Taiwan exporters. On April 13, the
PRC announced that it would investigate allegations of
dumping by Taiwan spandex exporters. More than 58 percent of
Taiwan,s spandex exports go to the PRC. Taiwan is the
PRC,s fifth largest supplier after S. Korea, Japan,
Singapore and the U.S. On June 7, the PRC announced it would
investigate dumping charges against Taiwan and Japanese
polybutylene terephthalate (PBT) resin exporters. In 2004,
the PRC accounted for 65 percent of Taiwan,s global PBT
exports. According to Taiwan,s Bureau of Foreign Trade,
this is the ninth dumping investigation case conducted by
Mainland China against Taiwan. The PRC also announced on May
31 that it would impose antidumping tariffs of 7.2 to 14.4
percent on unbleached kraft liner/liner board exports (used
primarily to make boxes) to the PRC by three Taiwan paper
companies after an investigation initiated in March 2004.

Exchanges: ASL Briefly Slows Pace but Visits Continue
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8. (U) In the weeks following the PRC,s passage of the
Anti-Secession Law on March 14, several events underscored
the Taiwan government,s effort to slow cross-Strait
exchanges. On April 10, MAC temporarily banned reporters
from the PRC,s Xinhua News Agency and the People,s Daily.
MAC accused the two PRC central government media outlets of
filing unbalanced reports that did not help the people of
Mainland China better understand Taiwan. MAC also announced
on May 30, that five delegations of Mainland exchange
visitors had been forced to leave Taiwan during April and May
for various reasons such as staying longer than authorized
and engaging in unauthorized activities.


9. (U) In response to MAC requests, TaiTRA announced on April
14 the cancellation of its participation in several PRC trade
exhibitions, including the May 23 Beijing International
Technology Trade Fair. Subsequently, many Taiwan firms
cancelled their participation in the Beijing Technology Fair
as well. Although Taiwan firms had reserved about 60 booths,
only 35 of them were actually used. According to media
reports, twenty-five of those were occupied by PowerChip,
whose Chairman Frank Huang, was a co-host of the event.
Reports indicated that only five Taiwan firms participated in
the event.

10. (U) Nevertheless, in addition to the high profile Lien
Chan and James Soong visits, cross-Strait exchanges
continued. One highlight was the May 31-June 3 Computex
Taipei, the world,s second largest computer show. According
to the Taipei Computer Association, the host for the event,
more than 1,000 Mainland high-tech personnel attended the
show, including senior executives from Lenovo, Beijing
Founder Electronics, TCL Corp. and Datang Microelectronics
Technology, one of the PRC,s largest IC design houses. The
show was preceded by a May 26 PRC visit by a Taipei Computer
Association delegation to meet with Ministry of Science and
Technology officials. After the meeting, the two sides
announced plans to cooperate on developing RFID logistics
applications.


11. (U) Important visits in the financial sector included a
May 21 visit to Taiwan by Vice Chairman Wang Jun of the China
International Trust and Investment Corporation (CITIC) Group,
the state-owned conglomerate that oversees the Chinese
government,s international investments. Wang met with
officials of the Financial Supervisory Commission and
Taiwan,s Central Bank of China as well as executives of
major financial holding companies such as Fubon, Tai Shin and
First Financial Holding Co. On May 26, Taiwan Securities
Association (TSA) Chairman Chien Hung-wen visited Beijing and
met with Zhuang Yixin, Chairman of the Securities Association
of China (SAC),to discuss cross-Strait liberalization of
securities markets.

Transportation and Travel: South Korea and Mini-Links
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12. (U) Two Taiwan airlines increased cross-Strait air travel
options via South Korea during the quarter. On June 13,
China Airlines (CAL) and Korean Air jointly announced that
they would increase the frequency of Taipei-Seoul flights
from 9 flights to 18 per week. CAL and Korean Air both use
these flights to provide service from Taipei to seven
mainland cities -- Beijing, Shanghai, Qingdao, Shenyang,
Tianjin, Xuhan and Jinan )- in conjunction with PRC
airlines. TransAsia Airways on June 30 announced that it
would begin twice weekly service from Taipei to Cheju, South
Korea, which would connect to onward flights to Dalien,
China, on the PRC,s Southern Airlines. Far East Air
Transport Corp. already offers connections to Shanghai via
Cheju with the PRC,s Eastern Airlines.


9. (U) The PRC,s Xiamen Airlines made an effort to promote
international travel via Xiamen Airport for residents of
Taiwan-controlled Kinmen Island. On April 4, Deng Dongtao,
Vice President of Passenger Service for Xiamen Airlines, led
a delegation to visit Kinmen and signed a letter of intent
with 11 Kinmen travel agents to promote such travel. In
addition, Taiwan-controlled Matsu Island saw its first group
of tourists from Fujian since the liberalization of Fujian
resident travel to Kinmen and Matsu implemented by Fujian
Province in December 2004. On June 27, the 86-member group
arrived in Matsu for a three-day trip. Interest in travel to
Kinmen has also been low since last year,s liberalization
measures were implemented; to date only some 2,000 Fujian
residents have visited Kinmen.
KEEGAN