LOOKING AHEAD AT CROSS-STRAIT ECONOMIC POLICY

C O N F I D E N T I A L SECTION 01 OF 04 TAIPEI 002336

SIPDIS

SIPDIS

STATE PASS USTR, STATE FOR EAP/TC,USTR FOR STRATFORD AND
ALTBACH, TREASURY FOR OASIA/TTYANG, COMMERCE FOR
4431/ITA/MAC/AP/OPB/TAIWAN

E.O. 12958: DECL: 10/14/2017
TAGS: ECON ETRD EINV EFIN PINR TW CH
SUBJECT: LOOKING AHEAD AT CROSS-STRAIT ECONOMIC POLICY

TAIPEI 00002336 001.2 OF 004


Classified By: Robert S. Wang, AIT Acting Director, for reasons 1.4 (b)
and (d).


1. (C) SUMMARY. During recent discussions of future
cross-Strait economic policy with AIT economic chief,
Mainland Affairs Council Chairman Chen Min-tong and prominent
private analysts all predicted eventual progress on
establishing direct passenger flights, easing investment
restrictions, and increasing the number of Mainland tourists
in Taiwan, regardless of who wins the March presidential
election. Analyst Daniel Liu, however, cautioned that
technology transfer and investment have supplanted direct
transportation links as a top Chinese priority. Chen, an
advisor to DPP presidential candidate Frank Hsieh, advocated
cross-Strait financial sector liberalization, including the
possibility of allowing Chinese banks to use representative
agents in Taiwan. END SUMMARY.


2. (SBU) Chen Min-tong is Chairman of the Mainland Affairs
Council (MAC),a Cabinet-level official agency, and advises
DPP presidential candidate Frank Hsieh on cross-Strait
economic policy. Daniel Liu (Liu Da-nien) is International
Division Research fellow at the Chung-Hua Institution for
Economic Research (CIER),a Blue-leaning think tank supported
by both official and private funds. David Hong (Hong
De-sheng) is president of the Green-leaning Taiwan Institute
of Economic Research (TIER),a private think tank.

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Current status of cross-Strait economic relations
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3. (C) According to Hong, starting in the early 1990s, Taiwan
investment in China focused on labor-intensive manufacturing.
This investment helped China develop its own labor-intensive
industrial sector, he noted. Since 2000, however, Taiwan's
investment has shifted into high technology, with some
accompanying technology and managerial transfer. Liu
observed that China now accounts for over half of Taiwan's
overseas investment, and that sales to China are the largest
contributing factor to Taiwan's trade surplus. Taiwan
companies increasingly treat China as a "home market," he
observed. In recent years, he continued, Taiwan investors
have shifted from seeing the Mainland as a "world factory,"
and now view it as a market.


4. (C) In Liu's analysis, Taiwan and South Korean investors
are following different Mainland strategies: Korean
companies are first building brand awareness and then
exploiting the market, while Taiwan firms continue to focus
on original equipment manufacturing (OEM),and are relatively
weak in branding. According to Liu, Taiwan's most successful
Mainland investors are able to exploit China's cost
advantages while retaining higher value-added functions in
Taiwan. Giant, for example, makes low-end bicycles on the
Mainland, but continues to manufacture its high-end products
in Taiwan. Other firms, however, have almost entirely
abandoned Taiwan for China. Liu cited anecdotal evidence
that some investors have returned to Taiwan due to rising
labor costs in China. A Shanghai-area university graduate,
for example, earns nearly as much as a Taiwan counterpart,
but is perceived to be less qualified and efficient. As a
result, said Liu, some Taiwan firms have shifted employment
back home. (Note: We also have anecdotal reports that Taiwan
firms have repatriated some work from the Mainland due to
Taiwan's stronger IPR protection regime.)

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Facts and figures
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5. (SBU) Hong said that there are between 800,000 and 1
million Taiwan residents now living on the Mainland. In the
early 1990s, small business owners and their employees
dominated the Taiwan presence, but in recent years the
profile has shifted in favor of young college graduates.
According to Liu, roughly 1 million Taiwan residents now live
in China. Further, he said, a large number, perhaps up to an
additional 1 million, use China as their main residence, but

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return temporarily to Taiwan every several months. Liu noted
that recent years have seen a relatively higher percentage of
young, well-educated Taiwan residents move to the Mainland.
A growing number of entire families are moving across the
Strait, he added, rather than just single workers. MAC
Chairman Chen estimated the number of Taiwan residents in
China at 1 million. (Note: The Taiwan authorities do not
appear to have a firm count of the number of Taiwan residents
who have moved to China, perhaps because some maintain
residences in both places. 1 million is the most
commonly-used figure.)


6. (SBU) Taiwan statistics put cumulative Taiwan investment
in China at USD 59.729 billion, a figure Liu says should be
seen as a "floor," since it does not include investment made
via international tax havens, or made by Taiwan's small- and
medium-sized enterprises (SMEs). The corresponding PRC figure
on Taiwan investment in the Mainland is over USD 100 billion,
and Liu estimated that the actual figure is probably at least
USD 120 billion. Chen put Taiwan's actual investment total
at about USD 150 billion.


7. (SBU) Regarding fund repatriation by Taiwan investors on
the Mainland, Hong said Taiwan investors in China typically
repatriate funds via Hong Kong or other third country
channels. Although these channels are quite open, he
explained, Taiwan's double taxation and inheritance taxation
regulations result in a "very small" level of actual fund
repatriation. Citing Ministry of Economic Affairs statistics
for 2005, Hong noted that 41.28 percent of Taiwan company
profits are kept in China as capital reserves, while 24.56
percent was reinvested on the Mainland and only 3.45 percent
was reinvested in Taiwan. Larger companies (i.e., those
traded on the stock exchange in Taipei) reinvested about 7-8
percent in Taiwan, he noted. Hong added that about 20
percent of Taiwan firms on the Mainland did not record any
profit in 2005.

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Cross-Strait policy priorities
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8. (C) Chen, who advises DPP presidential candidate Frank
Hsieh on cross-Strait economic policy, said that a Hsieh
administration would combine continuity with existing DPP
policy and "new vision" from Hsieh. Although cautioning that
China "always uses economic means to achieve political
purposes," Chen stated that a Hsieh administration would
combine "pro-active liberalization" and "effective
management" of the cross-Strait economic relationship.
(Note: This contrasts with the current more cautious policy
of "active management and effective liberalization.")
According to Chen, the PRC has stymied progress on
cross-Strait economic integration for fear that Chen
Shui-bian will garner the credit. If Hsieh wins the
presidential election, however, "China will have to
compromise with Taiwan and figure out a policy to move things
forward."


9. (C) Each of our interlocutors identified direct
transportation links, revision of investment restrictions,
and tourism as the top priorities for cross-Strait economic
liberalization. Hong stressed that certainty on
transportation policy may actually be more important than the
content of the policy itself, as Taiwan businesses must be
able to make plans based on clear policy expectations.
Regardless of who wins the presidential election, Liu does
not expect fast action on establishing direct links due to
the issue's extreme political sensitivity. In his analysis,
progress on direct transportation links is no longer a top
priority for China, which he believes is now focused on
encouraging Taiwan investment and technology transfer. Chen
emphasized the importance of establishing direct passenger
flights, and said that using the current cross-Strait charter
format could initially be used to avoid the political
complications inherent in signing a formal agreement with
China on establishing regular cross-Strait flights. Within a
year of expanded charter flights, he predicted, regular

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passenger service could be formally realized.


10. (C) On investment limits, Hong argued that the current
investment cap of 40 percent of a company's net worth should
be lifted, although he added that relatively few Taiwan
companies are subject to the limit in practice. He advocated
a flexible, case-by-case approach to investment ceilings,
rather than a blanket ceiling. Liu predicted an easing of
investment restrictions after Chen Shui-bian leaves office,
especially in the financial sector, as Taiwan investors are
increasingly demanding help in facilitating RMB transactions.
In Hong's analysis, the ball is primarily in China's court
to facilitate Taiwan investment in the Mainland financial
sector. Both sides need to work out daily settlement
mechanisms, but the Chinese, he asserted, "don't want to sit
down with us to talk."


11. (C) Chairman Chen was generally supportive of a more
permissive cross-Strait investment regime, but expressed
concern about job loss in Taiwan's manufacturing sector, as
well as the ramifications of China's drive to move up the
technology ladder. Intel's investment in Dalian, he
observed, is "giving us a lot of pressure." In his view,
China's expansion into high-technology will place increasing
competitive pressure on both Taiwan and the U.S. According
to Chen, provided the reform does not threaten Taiwan's
sovereignty, Frank Hsieh would probably consider allowing an
"incremental opening" to Chinese investment in Taiwan,
although it is not clear which sectors would be affected.
Chen supported liberalizing cross-Strait banking exchanges,
possibly to include mechanisms for Chinese banks to use
representative agents in Taiwan, as well as allowing use of
the RMB here.


12. (C) Hong supported increased tourism from the Mainland,
but added that a ceiling should be set on annual arrivals.
Otherwise, he argued, Chinese tourists could "overwhelm
Taiwan identity." Liu predicted a relaxation of restrictions
on Mainland tourists, no matter who wins the election.
Chairman Chen supported an eventual increase in the quota of
Chinese tourists to 3,000 per day.


13. (C) COMMENT. Despite variations in emphasis and analysis,
these conversations reveal a significant consensus on the
priorities for cross-Street economic liberalization.
Regardless of who wins the presidential election, increased
economic integration across the Taiwan Strait will not be a
question of if, but rather how, and at what pace. END COMMENT.

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Biographic data
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14. (C) Chen Min-tong was born in Taichung on November 25,

1955. One of his parents is aboriginal. He holds bachelor's
master's, and doctoral degrees in political science from
National Taiwan University (NTU),and conducted post-doctoral
East Asian studies at Columbia University in 1991. Chen has
held various research fellowships at NTU, and from 1996 has
been a professor at NTU's Institute of National Development.
In 2000-2004, he served as Vice Chairman of the Mainland
Affairs Council, and assumed his present position as
President in April 2007. Chen and his wife, who works for
the Bank of Taiwan, have two children. Chen speaks
moderately fluent English.


15. (SBU) David Hong (Hong De-sheng) appears to be in his
60s. Originally from Changhua, he holds a bachelor's degree
in economics from National Taiwan University, a master's
degree in economics from Vanderbilt University, and a
doctorate in economics from the University of Minnesota. In
1981-84, he was economic service manager at the Minnesota
Department of Public Service. From 1985 through 1993, Hong
held various positions with Northern States Power Company in
Minneapolis. In 1989-90, he was also an adjunct economics
professor at St. Thomas College in Minneapolis. After
returning to Taiwan in 1994, Hong was Director of the Taipei
City Finance Department, and has since held various positions

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at the Taiwan Institute of Economic Research. Hong speaks
fluent English.


16. (SBU) Daniel Liu (Liu Da-nien) appears to be in his 40s.
A Taipei native, his parents are from the Mainland, and his
father came to Taiwan in 1949 with the Nationalist army. He
received his doctorate from Cornell University, where he
studied in 1985-90. Liu speaks fluent English.
WANG