CROSS-STRAIT INVESTMENT 1ST HALF OF 2005 - MOVING

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 003154 SIPDIS DEPT FOR EAP/TC PLEASE PASS AIT/W E.O. 12958: DECL: 07/26/2015 TAGS: ECON EINV TW CH SUBJECT: CROSS-STRAIT INVESTMENT 1ST HALF OF 2005 - MOVING AND POSSIBLY SLOWING REF: A. 04 TAIPEI 3930 ¶B. TAIPEI 1191 Classified By: AIT Director Douglas H. Paal, Reason 1.5 d Summary -------------- ¶1. (C) Taiwan government data on Taiwan investment in the PRC showed that the total value of investment for the first six months of 2005 fell by 22 percent. While investment fell substantially in the Yangtze and Pearl River Deltas and Fujian Province, which have been the destinations of the vast majority of Taiwan investment, it rose in provinces farther north and west, especially Shandong, Sichuan and Guangxi. Investment fell sharply in electronics manufacturing but increased in mining (including cement manufacturing),warehouses, finance and insurance and construction. Although the data suggest that Taiwan approved investment in the PRC may have peaked last year, this could be because Taiwan firms have instead begun reinvesting profits earned in the Mainland. If so, it does not mean that economic cross-Strait links have stopped growing. In fact, the increase in investment farther upstream in the supply chain and in services could suggest more profound economic integration across the Taiwan Strait. End comment. Slowing Overall? -------------- ¶2. (U) Taiwan Ministry of Economic Affairs Investment Commission (IC) data on approved Taiwan investment in the PRC for the first six months of 2005 suggest that investment levels may be starting to fall. The first half of 2005 showed 651 approved investment cases worth a total of USD 2.6 billion. This represented a 22 percent decline in value from 1,074 cases totaling USD 3.4 billion during the first six months of 2004. PRC data for the first quarter of the year also showed declines for both contracted value of Taiwan investment in the PRC and realized value (total dollars actually spent). They fell by 15.7 percent and 7.7 percent respectively. (Note: PRC data for the second quarter are not yet available. End note.) ¶3. (C) The overall decline was probably caused by several factors. Global economic factors are likely to have played a role, including expectations of slower global growth and higher oil prices. Economic conditions in the PRC, including labor shortages and rising wages in the coastal provinces, energy shortages, and macro-economic controls aimed at slowing China's growth, may have also had an impact. Tsai Horng-ming, Deputy Secretary General of the Chinese National Federation of Industry commented to AIT/T that many Taiwan firms accelerated their investment plans last year or even earlier to get in before appreciation of the Renminbi. In addition, IC Executive Secretary Huang Chin-tan speculated that after several years of very high levels of Taiwan investment in the PRC, most Taiwan firms that want to invest there have already done so. They may now be in a position to expand operations there using local revenue without applying for further permission from the Taiwan government. Moving North and West -------------- ¶4. (U) Although the Pearl and Yangtze River Delta areas and Fujian province continue to be the destination for the vast majority of Taiwan investment in the PRC, other provinces farther north and west saw major increases. Together Guangdong Province, home of the Pearl River Delta; the Yangtze River Delta's Jiangsu and Zhejiang Provinces; and Fujian Province, just across the Strait from Taiwan, accounted for 89 percent of total Taiwan investment in the Mainland during the first six months of 2005. However, the amount of investment declined compared to the same period last year by the following percentages: Zhejiang - 40 percent, Jiangsu - 29 percent, Fujian - 29 percent and Guangdong - 8 percent. This followed earlier declines in the yearly total for 2004 compared to 2003 for Jiangsu, Fujian and Guangdong. Guangdong saw the sharpest decline in 2004 with a 32 percent decrease. These results probably reflect increasing wages and energy shortages in the coastal provinces, which have seen more rapid economic growth. ¶5. (U) Meanwhile, investment levels increased during the first half of the year compared to the same period in 2004 for several provinces in the PRC's north-east and west. Shandong Province saw the highest growth both in the total increase in value and as a percentage change. During the first six months of the year, Taiwan firms invested USD 75 million in Shandong, compared to USD 28 million during the first half of 2004, representing a 160 percent increase. Other provinces with large percentage increases included: Sichuan - 35 percent, Guangxi - 31 percent, Hainan - 22 percent, and Hebei - 14 percent. Heading Upstream -------------- ¶6. (U) The first half of 2005 data also showed some signs that Taiwan investment in the PRC, previously characterized by the labor-intensive assembly of consumer goods for export to the United States, Europe and Japan, continues to move farther upstream and diversify into services. Electronics manufacturing still accounted for 44 percent of total investment during the period. However, the total value of investment declined to USD 1.17 billion from USD 1.71 billion during the first half of 2004, marking a 31 percent decrease. The industries with the highest percentage increase were mining (including cement manufacturing) with a 350 percent increase, warehouses with a 327 percent increase, finance and insurance up by 108 percent, and construction up by 103 percent. Notably, Taiwan investment in PRC apparel manufacturing rose by 65 percent over the same period last year, probably due to Taiwan firms trying to take advantage of the elimination of textile quotas by the WTO starting this year. Comment - Investment Slowing, Integration Growing -------------- -------------- ¶7. (C) The latest Taiwan data on investment in the PRC suggest annual investment levels approved by Taiwan's IC may have peaked last year. However, as IC's Huang points out, this may in part be due to the ability of Taiwan firms to reinvest profits earned in the Mainland. If so, it does not mean that economic cross-Strait links have stopped growing. In fact, the trend toward more investment upstream and in services could suggest more profound economic integration across the Taiwan Strait. End comment. ¶8. (U) Taiwan Ministry of Economic Affairs IC data on Taiwan investment in the PRC will be posted on the AIT siprnet site at www.state.sgov.gov/p/eap/taipei/ and intranet site at taipei.state.gov. PAAL