Taiwan Investors Lament Changing Investment Environment in

UNCLAS SECTION 01 OF 02 GUANGZHOU 001180 SIPDIS SENSITIVE SIPDIS STATE FOR EAP/CM AND EAP/TC E.O. 12958: N/A TAGS: EINV ETRD ELAB SENV TW CH SUBJECT: Taiwan Investors Lament Changing Investment Environment in Pearl River Delta (U) THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED. IT SHOULD NOT BE DISSEMINATED OUTSIDE U.S. GOVERNMENT CHANNELS OR IN ANY PUBLIC FORUM WITHOUT THE WRITTEN CONCURRENCE OF THE ORIGINATOR. IT SHOULD NOT BE POSTED ON THE INTERNET. ¶1. (SBU) Summary: Taiwan investors in Dongguan complain that China's new Labor Law, rising wages, and policies aimed at directing labor-intensive and highly-polluting industries away from coastal regions are harming the investment environment in the Pearl River Delta. However, even with these downsides and the closure of as many as 5,000 enterprises with Hong Kong and Taiwan investment, some still find Dongguan and other areas in China to be attractive options for investment. End summary. Labor-Intensive Industries Squeezed -------------- ¶2. (SBU) During lunch with Congenoffs, Taiwan investors in Guangdong's Dongguan municipality, about an hour outside of Guangzhou to the south in the Pearl River Delta, said that the combination of China's new Labor Law, a tightening labor market in the Pearl River Delta, and new policies aimed at influencing investment patterns had reduced the flow of foreign investment. (Note: Dongguan is one of China's largest centers of Taiwan investment. The Dongguan Taiwan Businessmen's Association (TBA) estimates that there are more than 100,000 Taiwan residents, about 6,500 registered Taiwan companies and many unregistered Taiwan businesses in the municipality. End note.) Samuel Kuo, the chair of the Dongguan TBA and Samson Group, told us that as many as 5,000 enterprises, mainly Hong Kong and Taiwan-owned companies, have closed down in the area recently. In addition, many are considering moving to other parts of China. He said that efforts to replace labor-intensive industries in the area with high-tech investment had, in the meantime, been slow to yield results. Kuo explained that competition for high-tech investment in China was fierce because cities in west and central China also sought to attract such investment in an attempt to leap-frog growth led by labor-intensive industries. Labor Law Adds Costs to Rising Wages -------------- ¶3. (SBU) Phillip Lee, Dongguan TBA's vice chair and owner of Jorden Furniture Manufacture Co., called China's new Labor Law the biggest challenge for investors in south China. He argued that the law was biased against employers as it placed new obligations on them without offering any new benefits. He complained in particular about a requirement to give compensation to employees who resign regardless of the reason for their departure. Lee said it would be difficult to estimate the costs imposed by the new requirements, but Kuo speculated it would raise total labor costs by 10 to 20 percent. ¶4. (SBU) Kuo pointed out that these increased costs would come on top of already rising wages in the Pearl River Delta. As other parts of China develop economically, fewer and fewer migrant laborers come to Dongguan, he explained. According to Kuo and his TBA colleagues, it not only takes higher wages to find new workers, it also takes longer to recruit them. And More Investment-Discouraging Policies -------------- ¶5. (SBU) The Taiwan executives cited other policy changes that have burdened investors. Kuo commented that changes in the value-added tax (VAT) rebate regulations and new guarantee requirements for export processors would have a substantial impact on Taiwan firms in Dongguan. Tony Lin, another TBA vice chair and president of Ya Hsin Electronics, complained of new policies that discourage investment in highly-polluting industries. He told Congenoffs that it was no longer possible to get licenses to build printed circuit board factories in Dongguan or elsewhere in the Pearl River Delta due to concerns about environmental impact. Kuo also noted that benefits Taiwan investors used to enjoy -- like tax holidays -- were a thing of the past. But the PRD Is Still Attractive -------------- ¶6. (SBU) Nevertheless, Kuo said that he would not move his business away from Dongguan. Kuo's firm, which makes wood furniture, is in one of the industries affected by VAT rebate changes and new rules for export processing. The United States is his major market and most of his products are made from imported wood, including wood from the United States. He acknowledged that some Taiwan firms are GUANGZHOU 00001180 002 OF 002 moving to alternative low-wage locations such as Vietnam or Indonesia, but he believes that China is still the best place for investment. In addition to superior infrastructure, Kuo claimed that areas like Dongguan and Shanghai have governments that know how to work with foreign investors. Comment - Chilling Effect, but Not a Freeze -------------- ¶7. (SBU) The comments of Taiwan investors in Dongguan suggest that central government policies intended to redirect labor-intensive and highly-polluting industries away from coastal provinces are being implemented at the local level to some effect. However, despite complaints, at least some investors, even in industries targeted for redirection, still find the Pearl River Delta an attractive destination. GOLDBERG