"ACTIVE MANAGEMENT" DETAILS EMERGING

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 000220 SIPDIS SIPDIS DEPT FOR EAP/TC E.O. 12958: DECL: 01/20/2016 TAGS: EINV ECON CH TW SUBJECT: "ACTIVE MANAGEMENT" DETAILS EMERGING REF: A. TAIPEI 9 ¶B. TAIPEI 55 ¶C. TAIPEI 85 ¶D. TAIPEI 175 Classified By: AIT Director Douglas H. Paal, Reason 1.4 d ¶1. (C) Summary: At a January 11 meeting of the Democratic Progressive Party (DPP) Central Committee, Minister Ho Mei- yueh of the Ministry of Economic Affairs (MOEA) proposed various measures to implement President Chen Shui-bian's "active management" policy for investment in the PRC. The measures seek to improve pre-investment assessment of investment applications; post-investment monitoring of firms' activities in the Mainland; the ability of the government to monitor and address the investment's impact on the Taiwan economy; and investigative capabilities. The head of MOEA's Investment Commission told AIT/T that the new measures did not represent a change in policy and that the new procedures had largely been in place at the Investment Commission for the last six months. However, the new policy and its accompanying measures send a clear message that investment in the PRC is going to get more difficult for Taiwan firms. End summary. ¶2. (U) According to a report in Economic Daily News, a Taiwan business daily, Minister of Economic Affairs Ho Mei- yueh reported January 11 to a DPP Central Committee meeting on proposed measures to implement President Chen's new "active management" policy for investment in the PRC announced in his January 1 speech. Ho proposed changes in four broad categories: pre-investment assessment, post- investment management, industrial management, and investigation of illegal investment. At the same meeting, Mainland Affairs Council (MAC) Vice Chairman Michael Y.L. You reported on other cross-Strait economic policy proposals. Pre-Investment -------------- ¶3. (U) In the first category of pre-investment assessment, Ho described separate procedures for small and large investments, with USD 20 million marking the boundary between small and large. She said that procedures for small investments would see little change and will be approved based on a simple evaluation of the firm's documentation. For larger investments, she said that there would be an inter-agency case-by-case review, and for investments designated as "important" a special inter- agency task force would be formed. ; Post-Investment -------------- ¶4. (U) The new post-investment measures put forward by Ho generally increase reporting requirements for Taiwan firms that invest in the Mainland. They would have to provide implementation status reports annually, or possibly even quarterly. In addition, their financial reports would be submitted to the Taiwan Bankers Association's Joint Credit Information Center for review. MOEA also has plans to establish a more effective mechanism for gathering information about firms' operations in the Mainland. This mechanism could include using private sector agents, but a detailed plans has not yet been developed. Industrial Management -------------- ¶5. (U) The "industrial management" policies seek mainly to enhance the government's ability to monitor and address the domestic effects of investment in the PRC to avoid industrial hollowing-out. Under these measures, MOEA would monitor employment and labor conditions of the firm's Taiwan operations. It would also keep close track of the investment levels, and financial statements for the parent firms in Taiwan and any possible replacement effect of TAIPEI 00000220 002 OF 002 output from PRC investment on goods that would otherwise be produced in Taiwan. In addition, MOEA would seek to physically inspect PRC operations, probably via private sector agents, when they identify unusual operations in the PRC that are not consistent with a firm's investment application. Investigations -------------- ¶6. (U) To improve investigation of illegal investment, Ho offered four proposals. First, MOEA would investigate unlawful cases identified by the media. Second, MOEA would use private credit agencies to seek information about possible violators. Third, it would increase penalties against violators and offer higher rewards for those that report illegal investment. Finally, in cases where MOEA found a Taiwan firm to have violated the 40 percent of total paid-in capital limit on investment in the PRC, MOEA would have the authority to require the Taiwan firm to increase its investment in Taiwan. ¶7. (C) Econoff met with MOEA Investment Commission Executive Secretary Huang Chin-tan on January 17 to discuss the new measures. Huang said that he had drafted the new proposals based on Ho's instructions, which asked him to focus on "important investments." He underscored that small businesses in Taiwan would face no additional difficulties due to the changes. He also emphasized that these measures and the "active management" policy, which he pointedly called a "slogan" (kou hao),represented little real change from the procedures that the Investment Commission had been following for the past six months. According to Huang, the Investment Commission will focus on potential violators; legitimate investors won't have any problem continuing operations in the PRC or getting new investments approved. In addition, he commented that the proposal to examine applications for large investment on a case-by-case basis might even offer additional flexibility in terms of the 40 percent cap on investment. ¶8. (C) Comment: Despite Huang's protestations that Taiwan's policy had not been changed and that the measures put forward by Minister Ho had already largely been in place for the past six months, these proposals are a clear indication of the Chen administration's intention to tighten restrictions on cross-Strait investment. Many of these measures appear to be little more than common sense approaches to improving the enforcement of the regulations on the books. However, some of the additional reporting requirements will impose a significant new requirement on Taiwan firms, and some new authorities provided by these measures could be prone to selective use or abuse. The important message of the new policy statement and its accompanying measures is that investment in the PRC is going to get harder not easier -- the wrong message for Taiwan firms and the Taiwan economy. End comment. PAAL