CROSS-STRAIT INVESTMENT - PACE OF LIBERALIZATION

UNCLAS SECTION 01 OF 03 TAIPEI 000704 SIPDIS SENSITIVE SIPDIS STATE PASS USTR STATE FOR EAP/TC COMMERCE FOR 3132/USFCS/OIO/EAP/WZARIT TREASURY FOR OASIA/LMOGHTADER USTR FOR STRATFORD, ALTBACH E.O. 12958: N/A TAGS: EINV ECON PREL CH TW SUBJECT: CROSS-STRAIT INVESTMENT - PACE OF LIBERALIZATION HAS ACCELERATED REF: A. TAIPEI 490 ¶B. TAIPEI 25 ¶C. 06 TAIPEI 4164 ¶D. 06 TAIPEI 1584 ¶E. 06 TAIPEI 1487 ¶F. 06 TAIPEI 1481 ¶G. 05 TAIPEI 4938 ¶1. (SBU) Summary: Taiwan has liberalized restrictions on investment in the PRC at a more rapid pace in 2006 after several years of little progress. This contributed to a 27 percent rise in approved China-bound investment last year. However, capital limits and industry-specific restrictions remain in place, holding back some of Taiwan's most competitive firms. End summary. Cross-Strait Opening Reaccelerates -------------- ¶2. (U) Taiwan's efforts to lift restrictions on investment in the PRC appear to have accelerated again in that last year after several years of slow progress. Major liberalization measures since 2000 include the following: --November 7, 2001 - Firms permitted to invest directly in the PRC without routing investment through a third territory. --January 1, 2002 - Investment ban lifted on 122 categories of information technology and consumer electronic manufacturing, including PCs and mobile phones. Investment regulations simplified and ban lifted on investment projects valued at more than US$50 million. --March 29, 2002 - Taiwan semiconductor manufacturers permitted to build plants in China that make chips with 0.25-micron feature size on eight-inch wafers. --April 26, 2002 - Investment ban lifted for additional industry categories, raising the number of permitted categories to 8,162 or 93 percent of all industrial categories. --August 12, 2002 - Investment ban lifted for 68 new categories of service industries, including civil aviation, real estate brokerage, insurance, construction, and retail sales. --February 14, 2005 - Ban lifted on investment in securities firms in the PRC. --April 27, 2006 - Ban lifted on investment in semiconductor packaging and testing services using less- advanced technologies. In addition, thin-film transistor liquid crystal display (TFT-LCD) manufacturers permitted to make small-sized panels in the Mainland. 
 --November 2, 2006 - Taiwan Tobacco and Wine Corp. becomes first Taiwan fully state-owned enterprise permitted to establish a representative office in China. --December 14, 2006 - Semiconductor manufacturing investment applications approved for ProMOS Technologies and Powerchip Semiconductor Corporation, two of Taiwan's leading dynamic random access memory (DRAM) producers. The applications had been submitted to the Ministry of Economic Affairs two years earlier. --December 29, 2006 - Investment permitted in semiconductor manufacturing using 0.18-micron technology. Signs of Impact -------------- ¶3. (U) The effects of the Chen administration's liberalization measures of the past year are readily apparent. Approved investment in China rose 27 percent in 2006 to US$7.64 billion after declining for two straight years. In December, investment was more than four times higher than the same month a year ago. This TAIPEI 00000704 002 OF 003 was due primarily to the approval of the ProMOS plan to build a semiconductor fab in Chongqing at a cost of US$365 million. In addition, Advanced Semiconductor Engineering (ASE),a semiconductor packaging and testing firm, was approved in December to buy a PRC packaging and testing firm for US$60 million (ref C). More recently, Taiwan Semiconductor Manufacturing Corporation (TSMC) was approved on March 20 to upgrade its plant in Songjiang, China, to 0.18-micron technology, the first company to receive approval from Taiwan under the reforms announced in late December. ¶4. (U) Ministry of Economic Affairs (MOEA) figures for Taiwan's total approved investment in the PRC are provided below in US$ billion: Approved Percentage Year Amount Growth -------------- -------------- -------------- 2001 2.78 6.8 2002 6.72 141.5 2003 7.70 14.5 2004 6.94 -9.8 2005 6.01 -13.5 2006 7.64 27.7 Note: On April 24, 2002, Taiwan announced an amnesty for investment in China made without MOEA approval. Investment totals for 2002 and 2003 include investment from previous years approved under the amnesty. These cases accounted for US$2.86 billion in 2002 and US$3.10 billion in 2003. End note. 40 Percent Limit Still in Place -------------- ¶5. (U) Nevertheless, important restrictions on Taiwan investment in the Mainland remain in place. One of the most controversial is a capital ceiling on investment often referred to as the 40 percent rule. The restriction is actually a graduated set of percentage limits based on a firm's total paid-in capital. Firms with total capital below NTD 5 billion (about USD 150 million) may invest up to NTD 80 million (USD 2.4 million) or 40 percent of total capital whichever is higher. Firms with total capital between NTD 5 billion and NTD 10 billion (USD 300 million) may invest 40 percent of NTD 5 billion plus 30 percent of the firm's capital over NTD 5 billion. Firms with total capital in excess of NTD 10 billion may additionally invest 20 percent of the amount over NTD 10 billion. ¶6. (U) Estimates vary of the number of firms affected by the 40 percent limit. One example often cited by industry analysts is Uni-President, Taiwan's largest food conglomerate. It has vast, diversified holdings in Taiwan that include more than 4,000 Seven-Eleven outlets. According to media reports, it has invested approximately US$350 million in China where it is now the number two brand food group (ref E). However, because Uni-President has reached the investment capital limit, it has sought alternative means to further expand its presence in China. It has used profits from its existing units in China to fund further investment. It has also reportedly sought private equity partners who would finance acquisitions in China that would be managed by Uni-President. In addition, the group has considered listing its China operations separately on the Hong Kong Stock Exchange. Industry-Specific Restrictions Also Persist -------------- ¶7. (U) Taiwan also maintains numerous industry-specific restrictions, especially for technology-intensive industries. Only investment in less advanced technologies has been opened for TFT-LCD panel manufacturers and semiconductor packaging and testing firms. Investment in integrated circuit (IC) design facilities is not permitted. (Note: Taiwan IC design firms are permitted to open customer service and sales centers in China. Industry observers speculate that many TAIPEI 00000704 003 OF 003 of these facilities also illegally engage in design engineering work as reported ref D. End note.) Semiconductor manufacturing investment was liberalized in December to allow investment using 0.18-micron technology, but Taiwan firms have already begun lobbying for liberalization of more advanced technology. TSMC Chairman Morris Chang, who represented Taiwan President Chen Shui-bian at the last APEC leaders meeting in Vietnam, called on the Taiwan authorities to allow investment in more advanced technology after Intel announced it would build a plant in Dalian, China, using 90-nanometer technology, two generations more advanced that what Taiwan permits. High-tech industry leaders have repeatedly argued that the restrictions give their Chinese and international competitors an advantage in the world's fastest growing semiconductor market. ¶8. (U) Investment restrictions also persist for some capital-intensive industries. Taiwan forbids its petrochemical companies from building naptha cracker facilities, which would cost billions of dollars, in China. Formosa Petrochemicals, which already exports more than half of it petrochemical output from Taiwan to China, is eager to expand with a naptha cracker facility in Ningbo, China (ref A). In addition, Taiwan banks are not permitted to establish branches or buy subsidiary banks in the Mainland. Many Taiwan banks see Mainland China as their natural market for expansion because of an existing customer base among Taiwan investors operating there (ref G). Several have already established representative offices in China. One, Taipei Fubon Bank, purchased a Hong Kong bank in part as a potential platform for expansion in the PRC. Comment - Moving Faster but the Journey's Not Over -------------- -------------- ¶9. (SBU) Taiwan's record of liberalization of cross- Strait investment restrictions has improved considerably in the last year. Under Premier Su Tseng-chang, the Democratic Progressive Party (DPP) administration has made some politically difficult choices that show a genuine commitment to progress in this area. However, Taiwan's economy will benefit more from even faster and more aggressive opening. The restrictions that remain continue to hold back Taiwan's most competitive firms from realizing their ambitious goals for the greater China market. WANG