TAIWAN 2006 INVESTMENT IN CHINA REACHES NEW HIGH

UNCLAS SECTION 01 OF 03 TAIPEI 000267

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USTR
STATE FOR EAP/TC
COMMERCE FOR 3132/USFCS/OIO/EAP/WZARIT
TREASURY FOR OASIA/LMOGHTADER

E.O. 12958: N/A
TAGS: EINV EFIN ECON TW CH
SUBJECT: TAIWAN 2006 INVESTMENT IN CHINA REACHES NEW HIGH

REF: 06 TAIWAN 4164


1. (U) Summary: Taiwan and PRC official data for
planned Taiwan investment in Mainland China both
reached new highs in 2006. Taiwan's approved
investment in China grew 27.2 percent from 2005 to
US$7.64 billion. The rise was due to a dramatic
increase in the size of investment projects. End
summary.

Approved Investment Surges
--------------


2. (U) Taiwan's 2006 approved investment in China grew
27.2 percent from 2005 to reach US$7.64 billion
according to data from Taiwan's Ministry of Economic
Affairs Investment Commission (MOEA/IC). This marked
a dramatic reverse from the 13.5-percent decline in

2005. The PRC maintained is position as the
predominant destination for Taiwan foreign investment,
but its share of Taiwan's total foreign direct
investment (FDI) declined to 63.9 percent from 71.0
percent in 2005. MOEA/IC data on approved investment
is provided below:

Approved Amount Percent Percent of
Year Cases (US$ billion) Change Total FDI
-------------- -------------- -------------- -------------- --------------
2004 2,004 6.94 51.1% 67.2%
2005 1,297 6.01 -13.5% 71.0%
2006 1,090 7.64 27.2% 63.9%



3. (U) The average size of approved investment
projects rose sharply as the number of cases fell. In
2006, MOEA/IC approved 1,090 investment proposals,
down from 1,297 in 2005. However, the average size
rose to US$7.0 million from US$4.6 million.


4. (U) MOEA/IC attributed the surge to investment
expansion by large Taiwan firms financed with revenue
earned in the PRC. Hon Hai Precision Industries, for
example, was approved to invest US$90 million and
US$100 million in two separate projects. Hon Hai has
been identified as the largest exporter and foreign
exchange earner in the PRC. In addition, large
semiconductor projects were approved after further
relaxation of Taiwan's investment policies for that
industry. Advanced Semiconductor Engineering Inc.
received approval to purchase a PRC semiconductor
packaging and testing firm for approximately US$60
million and ProMOS Technologies was authorized to
build a US$365 million chip factory (reftel). (Note:
The approval granted to Powerchip Semiconductor
Corporation in December 2006 to build a semiconductor
plant was preliminary pending submission of further
documentation. That investment will appear in
MOEA/IC's 2007 data. End note.)

East and South China Dominate
--------------


5. (U) Coastal provinces continue to be the main
destinations for Taiwan investment in the PRC.
Jiangsu Province took the lead with over 37.7 percent
of Taiwan's investment in the Mainland, followed by
Guangdong, Shanghai City, Zhejiang, and Fujian.
Together the five top areas accounted for 84.3 percent
of Taiwan's China investment. However, their
percentage share of total approved investment in China
fell from 91 percent in 2005. The largest increase
outside of the top five areas was in Chongqing City,
where the approved investment in the ProMOS
semiconductor facility drove up investment from
US$12.8 million in 2005 to US$398.3 million in 2006.
The following chart shows the number of approved cases
for each province with the total amount of approved
investment:

-- Approved Amount Percent of

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Location Cases (US$ million) Total
-------------- -------------- -------------- --------------
Jiangsu 282 2,883 37.7%
Guangdong 245 1,415 18.5%
Shanghai 190 1,042 13.6%
Zhejiang 52 591 7.7%
Fujian 155 520 6.8%
Others 166 1,191 15.7%
PRC Total 1,090 7,642 100.0%


6. (U) A recent report by the Taiwan Business
Association in Shenzhen indicated that Taiwan
enterprises in Shenzhen, Guangzhou, Dongguan, and other
cities in the Pearl River Delta area have faced a less
favorable investment environment in 2006. It
complained of rising production costs, shortages of
electricity and water, and new local government
policies forcing enterprises with high rates of energy
consumption and waste production to move elsewhere.
Others have noted a trend of labor-intensive
manufacturing moving away from coastal areas or out of
China to Vietnam and India. However, approved
investment in Guangzhou continued to grow in 2006,
rising 16.0 percent.

Focus Still on Electronics
--------------


7. (U) Taiwan's investment in Mainland China is
increasingly concentrated in manufacturing of
electronic goods, components and machinery. These
categories accounted for 44.8 percent of total 2006
Taiwan investment in PRC compared to 39.9 percent a
year earlier. Investment in electronic components,
used mainly in manufacturing of PCs, cell phones and
other IT hardware, was the largest single category
with approved investment valued at US$1.6 billion, a
90.4 percent increase over the previous year. Two
non-manufacturing industries also increased their
share of total investment. Wholesale and retail trade
and special, scientific and technical services
accounted for 4.1 percent and 3.0 percent of total
investment, respectively. The following chart shows
Taiwan investment data for the top ten major
industrial categories:

-- Amount Percent
Industry Cases (US$ mil.) of Total
-------------- -------------- -------------- --------------
Electronic components 94 1,619 21.2%
Computers, Telecom.
A/V equipment 73 1,140 14.9%
Electrical machinery 105 665 8.7%
Chemicals 49 548 7.2%
Metals and metal goods 72 447 5.8%
Precision, optical
--medical equipment 49 423 5.5%
Machinery 94 389 5.1%
Non-metallic minerals 23 387 5.1%
Wholesale and retail
--trade 150 313 4.1%
Special, scientific
--& technical services 62 232 3.0%
Plastic products 48 220 2.9%
Textiles 41 165 2.2%
Others 230 1,094 14.3%
Total 1,090 7,642 100.0%

PRC Data - Opposing Trends
--------------


8. (U) PRC data on Taiwan investment showed two
opposing trends. Figures for contracted value of
Taiwan investment rose 9.5 percent from US$10.3
billion in 2005 to US$11.3 billion last year.
Contracted investment has now increased for four
consecutive years. Like Taiwan's data on approved
investment, contracted investment reflect the
intentions of Taiwan firms to invest in the Mainland.
However, PRC data for realized investment, which

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attempts to measure dollars actually spent by Taiwan
investors, declined for the fourth straight year to
US$2.1 billion.


9. (U) According to our conversations with government
officials, academics and industry leaders, there are
several possible explanations for the growing
differences between contracted and realized
investment. First, Taiwan firms may exaggerate the
value of their contracted investment with the
encouragement of local PRC officials eager to show
rising levels of investment in their jurisdiction.
Second, PRC macroeconomic controls may delay central
government approval for projects that have already
been contracted. Finally, realized investment figures
may not capture all of the money spent by Taiwan
investors in the PRC. Realized investment figures are
based on funds remitted through banks to the PRC.
Taiwan investment in the Mainland is increasingly
financed with profits earned locally instead of funds
remitted from Taiwan. In addition, financing remitted
from Taiwan must be remitted indirectly through a
third territory such as Hong Kong, the British Virgin
Islands and other tax havens. Some of these funds may
not be identified as Taiwan investment in the PRC
realized investment statistics.

Comment - Taiwan Firms Still Eager to Invest
--------------


10. (SBU) Despite another decline in realized
investment, the Taiwan approved investment and PRC
contracted investment data both suggest that the
intentions of Taiwan firms are clear. They are still
eager to expand their investment in the PRC, and the
scale of that investment is growing. Cross-Strait
economic integration continues to deepen.
WANG