TAIWAN INVESTMENT IN CHINA GROWS

UNCLAS SECTION 01 OF 03 TAIPEI 003156 SIPDIS SENSITIVE SIPDIS STATE PASS USTR STATE FOR EAP/ TC, EAP/EP USTR FOR STRATFORD, ALTBACH USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT TREASURY FOR OASIA/LMOGHTADER TREASURY PLEASE PASS TO OCC/AMCMAHON TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN E.O. 12958: N/A TAGS: EINV EFIN ECON PINR TW SUBJECT: TAIWAN INVESTMENT IN CHINA GROWS Summary -------------- ¶1. (SBU) Taiwan's approved investment in China in the first half of 2006 shot up 35.2 percent from the corresponding period in 2005, totaling USD 3.56 billion and reversing a one-year decline. Much of the investment comes from firms expanding existing China operations. This strong growth suggests Taiwan efforts to encourage firms to diversify overseas investment are not succeeding. End summary. Taiwan's first half investment in China surges -------------- - ¶2. (U) Taiwan's approved investment in China in the first half of 2006 grew 35.2 percent from the corresponding period of 2005, totaling US$3.56 billion, according to Taiwan's Ministry of Economic Affairs Investment Commission (IC). The strong growth reversed a 13.5-percent annual decline in 2005 and put total investment for 2006 on track to beat 2004's record of US$6.94 billion. Despite efforts by authorities to encourage businesses to diversify their investment, the PRC continued to be the predominant destination for Taiwan foreign investment. It accounted for 66.9 percent of Taiwan's total outward foreign direct investment (FDI),down slightly from 71.1 percent for all of 2005. Approved Amount Percent of Period Cases (US$ billion) Total FDI -------------- -------------- -------------- -------------- 2006 Jan-Jun 519 3.56 66.9% 2005 Jan-Jun 651 2.63 68.7% 2005 Total 1,297 6.01 71.1% East and South China Still Dominate -------------- ¶3. (U) The Yangtze and Pearl River Deltas continue to be the main destinations for Taiwan investment in the PRC. Jiangsu Province took the lead to with over 38 percent of Taiwan's investment in the Mainland, followed by Guangdong, Shanghai City, Zhejiang, and Fujian. Together the five top areas accounted for 91 percent of Taiwan's China investment, the same proportion they held in 2005. The following chart shows the number of approved cases for each province with the total amount of approved investment: -- Approved Amount Percent of Location Cases (US$ million) Total -------------- -------------- -------------- -------------- Jiangsu 144 1,365 38.4% Guangdong 124 717 20.2% Shanghai 81 534 15.0% Zhejiang 27 389 11.0% Fujian 73 233 6.6% Others 70 317 8.9% PRC Total 519 3,556 100.0% Electronics Continue to Lead -------------- ¶4. (U) Electronic goods, components and machinery accounted for more than 48 percent of Taiwan's investment in the Mainland during the first half of the year. Investment in computers, communications and audio/video equipment manufacturing was the largest single category with approved investment valued at US$797 million, a 67.7 percent increase over the previous year. The top ten categories were all in TAIPEI 00003156 002 OF 003 manufacturing industries, accounting for 80 percent of total investment. The following chart shows Taiwan investment data for the top ten industrial categories: -- Amount Percent Industry Cases (US$ mil.) of Total -------------- -------------- -------------- -------------- Computers, Telecom. A/V equipment 53 797 22.4% Electronic components 23 568 16.0% Electrical machinery 75 371 10.4% Precision, optical --medical equipment 23 219 6.2% Chemicals 27 182 5.2% Non-metallic minerals 10 178 5.0% Metals and metal goods 34 161 4.6% Plastic products 26 141 4.0% Machinery 40 125 3.5% Textiles 24 115 3.3% Others 184 696 19.6% Total 519 3,556 100.0% Expanded Investments Play Important Role -------------- ¶5. (U) The strong growth in PRC investment appears to be due in large part to expansion of previous investment projects, rather than new projects by first-time Taiwan investors in the PRC. Many of these investments were financed by revenue generated in the PRC. Ten projects by nine large Taiwan firms with major existing investments in the PRC accounted for about 12 percent of total investment. These are Honhai Electronics (US$100 million),Chi-Mei (two projects of US$60 million and US$30 million),Asustek Computer Inc. (US$50 million),Promate Electronics (US$50 million),and Gigabyte Technology (US$50 million),Formosa Chemicals and Fibre Corp. (US$40 million),Topply (US$20 million),and UniPresident Group (US$40 million). PRC Data - Smaller Decline than 2005 -------------- ¶5. (U) PRC data on Taiwan investment showed a different picture. PRC Ministry of Foreign Commerce data showed that Taiwan realized investment (dollars actually spent versus approved or contracted investment) actually fell 12.2 percent in the first half of 2006 from the same period last year. This decline was smaller than the 31.1 percent decline for 2005. The total value of realized investment in the first six months of 2006 was US$1.03 billion. However, the PRC data for contracted Taiwan investment showed a 15.6 percent increase to US$5.52 billion. Comment - Diversification Efforts Unsuccessful -------------- - ¶6. (SBU) Except for the decline in realized Taiwan investment in China shown in the PRC data, the rest of the story is one of continued strong interest by Taiwan enterprises in expanding existing operations in China. Energy shortages, rising land and labor costs, macro-economic controls and uncertainty about the Renminbi's future exchange rate appear to be doing little to slow Taiwan investment in the Mainland. Taiwan authorities continuing efforts to encourage firms to diversify overseas investment also appear to be making little headway. TAIPEI 00003156 003 OF 003 YOUNG