Taiwan Determined to Prevent PRC-Linked Investor from

UNCLAS SECTION 01 OF 02 TAIPEI 000403

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USTR
STATE FOR EAP/ TC, EAP/EP
COMMERCE FOR 3132/USFCS/OIO/EAP/WZARIT
TREASURY FOR OASIA/LMOGHTADER
USTR FOR STRATFORD, ALTBACH

E.O. 12958: N/A
TAGS: EWWT EINV ECON PREL CH TW
SUBJECT: Taiwan Determined to Prevent PRC-Linked Investor from
Taking Over Shipping Company



1. (SBU) Summary: On February 9, the boards of two state-controlled
shipping companies, Taiwan Navigation and Yang Ming Marine, voted to
swap stocks in order to prevent privately held Chinese Maritime
Transport from taking control of Taiwan Navigation's board. Chinese
Maritime's chairman has close ties to the PRC. The firm has called
the swap illegal. However, on February 15, Taiwan financial
regulators fined its chairman for failing to report the firm's
acquisition of stock in Taiwan Navigation. The case shows the
serious concern Taiwan authorities have about the possibility of an
investor with close ties to the PRC taking control of a
state-controlled enterprise. End summary.


2. (U) On February 9, 2006, the boards of directors of Taiwan
Navigation Company and Yang Ming Marine Transport voted to swap
stock. Taiwan Navigation traded 51.57 million of its shares for
69.63 million shares of Yang Ming at a 1 to 1.35 ratio. Both Taiwan
Navigation and Yang Ming are shipping companies controlled by the
Taiwan authorities. Before the stock swap, the Taiwan authorities
owned 27 percent of Taiwan Navigation and approximately 35 percent
of Yang Ming. Taiwan Navigation operates 30 ships, focusing on
near-sea bulk commodity shipping. Yang Ming owns 79 vessels with
generally longer routes and more container shipping.


3. (U) Taiwan's Ministry of Transportation and Communications (MOTC)
ordered the swap to maintain control of Taiwan Navigation in the
face of a takeover bid from Chinese Maritime Transport. Chinese
Maritime is a Taiwan-registered company reportedly 67 percent owned
by John Peng of Hong Kong. It operates five bulk cargo vessels. In
just over a year, Chinese Maritime had acquired a 28.9 percent stake
in Taiwan Navigation to become the largest shareholder. MOTC
ordered the swap after Chinese Maritime requested seats on Taiwan
Navigation's board of directors, including the power to appoint the
chairman. The stock swap raised the Taiwan authorities and Yang
Ming's combined ownership in Taiwan Navigation to 41 percent.
Chinese Maritime's stake was diluted to 25.7 percent. Subsequently,
Yang Ming purchased additional stock in Taiwan Navigation to raise
the total stake controlled by the Taiwan authorities to nearly 49
percent.


4. (U) Some media reports have speculated that the authorities took
action because of Peng's support for the Pan Blue opposition and
close links to the PRC. Peng is a brother-in-law of CCP Political
Consultative Council Vice Chairman and former Hong Kong Chief
Executive Tung Chee-hwa. In addition, Peng has close connections
with other senior PRC officials, including Shanghai Deputy Mayor Hu
Yenchao. Taiwan law prohibits almost all investment in Taiwan from
PRC sources.


5. (U) In response to the swap, Chinese Maritime took out half-page
ads in two Taiwan business dailies calling the stock swap illegal
and against the interests of shareholders. Chinese Maritime argued
that a more appropriate swap ratio would have been 1 to 1.5. The
firm called other shareholders to join it in requesting an
investigation by Taiwan's Financial Supervisory Commission (FSC).
The FSC indicated that it would look into the swap.


6. (U) Initially, Chinese Maritime announced that it would spend
NT$1.6 billion (US$49 million) to raise its stake up to 37 percent
and seek more funding to further raise its stake. It also said it
would seek support from smaller shareholders to challenge the
control of the Taiwan authorities. However, on February 15 after it
had become apparent that Peng would not be able to top the
authorities' 49-percent stake; he told the press that he would keep
his stock because all parties agreed on Taiwan Navigation's future.


7. (U) On February 15, the FSC revealed that it had fined Chinese
Maritime's Peng NT$240,000 for failing to properly report Chinese
Maritime's acquisition of its stock in Taiwan Navigation. Chinese
Maritime purchased the stock through subsidiaries that are private
companies not subject to the same reporting requirements as Chinese
Maritime. However, the FSC pointed out that Taiwan law required
Chinese Maritime to report the purchases.


7. (SBU) Comment: The Taiwan Navigation case illustrates two
characteristics of Taiwan's economic policy. It shows the
determination of the Taiwan authorities to prevent an investor with
links to the PRC from taking control of a state-controlled
enterprise, even when it does not violate regulations that restrict
PRC investment in Taiwan. The Chen administration's "active

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management" of cross-Strait investment in cases like this suggests
an arbitrary and not entirely transparent policy. The case also
suggests that the Taiwan authorities only half-heartedly support
continuing privatization. It raises the question of why the
authorities need to maintain controlling interest in two commercial
shipping companies. End comment.

YOUNG