China Probes Intensified Taiwan Economic Engagement

C O N F I D E N T I A L SECTION 01 OF 02 BEIJING 003782

SIPDIS

STATE FOR INR/EC
STATE FOR INR/EAP
DEPT OF TREASURY WASHINGTON DC
DEPT OF COMMERCE WASHDC
DEPT OF ENERGY WASHINGTON DC
CIA WASHINGTON DC
NSC WASHDC

E.O. 12958: DECL: 09/28/2023
TAGS: ECON EFIN EINV CN TW
SUBJECT: China Probes Intensified Taiwan Economic Engagement

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Classified By: Economic Minister-Counselor Robert Luke for
Reasons 1.4 (b) and (d)


1. (C) Summary. Contacts from the public and private sectors and
several academics at government-affiliated think tanks expressed
optimism over the direction of cross-strait economic engagement,
attributing warming ties to the election of Ma Ying-jeou in March and
Taiwan's efforts to manage an economic downturn. Contacts were most
positive about the progress on transport links between China and
Taiwan and expected upcoming meetings to work out remaining
obstacles, such as establishing direct flights for both tourists and
cargo. Progress on increasing the numbers of tourists who visit
Taiwan would likely be slower, as the number of mainland travelers to
Taiwan grows gradually over time as the program matures. Future
rounds of cross-strait talks would likely turn to financial issues,
such as investment guarantees and protections, improved currency
clearing mechanisms, and opening Taiwan's stock markets to mainland
capital. End Summary.

China Welcomes Economic Engagement with Taiwan
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2. (C) Several embassy contacts pointed to Ma Ying-jeou's election
and Taiwan's economic struggles as drivers of improving cross-strait
economic engagement and characterized the mainland as happy to
facilitate the expansion of economic links between the two. China
Institute of Contemporary International Relations Research Fellow
Yuan Chunqiang said the economic relationship between China and
Taiwan has moved from one where the mainland provided most of the
impetus to one that is more mutually cooperative. Chinese Academy of
Social Sciences Institute of Taiwan Studies Fellow Sun Shengliang
claimed Taiwan President Ma Ying-jeou was under a lot of pressure to
improve the economy, prompting him to encourage visits from Chinese
tourists, facilitate transportation links, and lift investment
restrictions for Taiwan companies engaging in business in the
mainland. Sun said China was trying to help Taiwan, but cautioned
that China would move at a measured pace given its own concerns about
Chinese citizens doing "illegal things," probably a reference to
defections. Nonetheless, mainland Chinese businesses are
increasingly positive about economic engagement with Taiwan,
according to Yuan, as measures designed to showcase China's open and
flexible economic policies towards Taiwan are no longer met with the
hostility that characterized the Chen administration.

Expanding Transportation Links
--------------


3. (C) Contacts pointed to progress on the transportation issues as
evidence of Taiwan's efforts to facilitate economic engagement with
the mainland and were positive on the potential for continued
progress in the coming months.
Tsinghua University Institute of Taiwan Studies Professor
Liu Zhentao said direct flights between Taiwan and the mainland will
begin next month, and he expected that direct cargo and postal
flights would be discussed in late October ARATS-SEF talks, adding
that the costs for Taiwan to delay the implementation of direct
flights were too high. In Sun's view, Taiwan needed direct cargo
flights and shipping because it depended on the quick return of
electrical goods that are manufactured in the mainland. In addition
to direct flights, contacts expected China and Taiwan to increase the
number of departure cities for direct flights and permit more regular
weekday flights. Sun said China and Taiwan could agree to flights
nearly every day. The frequency would let Taiwan claim the flights
were still "charters."

Tourism Fails to Meet Expectations
--------------


4. (C) China-Taiwan Travel Agency General Manager Feng Zhuozhi said
procedures for prospective customers for the trips usually take at
least two weeks and he criticized the mainland for being slower than
Taiwan in approving permits for travel. So far, most mainlanders who
had gone to Taiwan went to see relatives or scout business
opportunities. Feng said his agency has separate departments to
handle tourists who seek to establish business contacts and tourists
primarily interested in sightseeing.


5. (SBU) Note: Starting July 18, 2008, mainlanders have been able to
travel to Taiwan on tour-groups organized by State Tourism
Administration (STA)-designated travel agencies. The number of
travelers is subject to an STA-issued quota of 3,000 per day, in
groups of 10-40 people, who can visit the island for up to 10 days.
Prospective travelers first pay relevant travel fees to the agency,
and then apply for permission to participate from the local Chinese
public security office. Mainland travelers also post a "bond" of at

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least 50,000 RMB (about USD 7300) to ensure they return, and also
must receive approval to visit from the Taiwan authorities. End
Note.


6. (C) The number of mainland tourists traveling to
Taiwan dropped off after the inauguration of weekend charter flights
in July, but contacts characterized this as a temporary lull and
expected the numbers to rise.
According to the State Council Taiwan Affairs Information
Office's Deputy Director General Huang Jianwen, the low number of
tourists was due to the fact the program was new and involved complex
procedures for arranging required permits. Other contacts agreed
that these procedures are a main cause of the low number of tourists.
Liu added that the high cost of roundtrip airfare also made a trip
to Taiwan prohibitively expensive.


7. (C) Huang added that the program was being implemented slowly.
Currently, only residents of the 13 "most developed" provinces were
allowed to participate. Feng said Taiwan's strategy of seeking
high-end tourists contributed to the low number, especially because a
majority of China's high income earners, including government and
some state-owned enterprise (SOE) officials, were not yet permitted
to go to Taiwan. Feng claimed he was lobbying officials in the State
Council's Taiwan Affairs Office to have these restrictions lifted.

Financial Issues on the Horizon
--------------


8. (C) One goal of upcoming discussions would be to normalize
economic relations, particularly in areas related to investment and
banking. Looking ahead to 2009, Sun expected both sides would use
future talks to discuss MOUs aimed at providing stronger investment
guarantees, improving currency clearing mechanisms, and opening
Taiwan's stock markets to mainland capital. Sun and Yuan predicted
that Taiwan would relax current prohibitions on mainland investment
and Yuan said some SOEs would probably look to invest in Taiwan,
particularly in the island's real estate and tourism sectors. The
mainland, meanwhile, is considering loosening regulations that
restrict Taiwan-based banks' ability to establish mainland
operations, and is reportedly considering permitting Taiwan banks to
establish branch offices to be used by Taiwan businessmen.

Comment - Economic Ties Could Help Resolve Political Issues
-------------- --------------


9. (C) A subtext of the meetings was that Taiwan has become
increasingly dependent on the mainland economy, and that by helping
Taiwan economically, the mainland was building capital that it could
leverage to address more complicated issues, such as Taiwan's
diplomatic status. Several contacts clearly saw closer economic
links as a first step to future cooperation on "thornier" political
and security challenges, and expressed confidence that successful
resolution of the economic issues would make tackling the other
issues easier, though they were reluctant to speculate on the
details.

PICCUTA