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