BEIJING CONTACTS HAIL ECONOMIC"BREAKTHOUGH" AT

C O N F I D E N T I A L SECTION 01 OF 03 BEIJING 001174

SIPDIS

E.O. 12958: DECL: 04/30/2024
TAGS: ECIN EFIN ETRD PREL TW CH
SUBJECT: BEIJING CONTACTS HAIL ECONOMIC"BREAKTHOUGH" AT
CROSS-STRAIT TALKS IN NANJING

REF: A. TAIPEI 500

B. BEIJING 1080

Classified By: Minister Counselor Robert S. Luke. Reasons 1.4 (b/d).

Summary
--------------


1. (C) Embassy contacts trumpeted the outcome of the April
25-26 PRC-Taiwan dialogue in Nanjing as a breakthrough for
cross-strait economic cooperation. Two contacts noted that
the rapid progress since the renewal of talks in June 2008
had "exceeded expectations." The Financial Cooperation
Agreement signaled a willingness to "normalize" economic
relations, contacts said. Taiwan businessmen would be the
biggest beneficiaries; Mainland firms seeking to do business
in Taiwan would still face investment and market access
restrictions. The anti-crime agreement might help Taiwan
pursue economic criminals who fled to the Mainland, but
Mainland authorities would still only approve extradition on
a case-by-case basis. A third agreement on air travel would
expand cross-Strait air links and allow for regularly
scheduled flights rather than charters. Perhaps the biggest
outcome of the Nanjing meeting was the decision to commence
dialogue on an Economic Cooperation Framework Agreement
(ECFA),which our interlocutors said was critical for Taiwan
to avoid being negatively impacted when the China-ASEAN FTA
is phased in beginning next year. Contacts agreed that the
domestic situation in Taiwan is the biggest obstacle to
achieving an ECFA and said that the mainland is willing to
accept unfavorable terms to further its goals of economic and
political integration. End Summary.

SEF-ARATS Agreements a Significant Breakthrough
-------------- --


2. (U) On April 26 in Nanjing, representatives from the
Mainland's Association for Relations Across the Taiwan Strait
(ARATS) and Taiwan's Straits Exchange Foundation (SEF) signed
three agreements covering cross-Strait economic relations.
The Financial Cooperation Agreement signed in Nanjing is
designed to ease investment regulations, and the Anti-Crime
Agreement aims to facilitate faster extradition of criminals.
The third document, the Air Traffic Agreement, will increase
the number of cross-Strait flights and allow them to operate
as "regularly scheduled" flights rather than charters.


3. (C) Guo Zhenyuan, a Senior Fellow at the MFA-affiliated
China Institute of International Studies told EmbOff April 27
that the agreements reflected a renewed emphasis on
"pragmatic progress" by both sides and that cross-Strait
advances over the past year have "far exceeded expectations."
With minor exceptions, Guo said, the "three direct links"
between the two sides were now "fully realized." Chen
Guoyuan, Secretary General of the Beijing Taiwan Enterprise
Association (BTEA),an organization representing Taiwan
investors in Beijing, was even more effusive in his praise of
the agreements, telling EmbOffs on April 28 that the Nanjing
talks had yielded a "very important breakthrough." He noted
that these agreements had been on hold for 12 years, and now,
in three rounds of cross-Strait talks over the last 10
months, all had been realized. Chen assessed that the
agreements and the expected signing of an Economic
Cooperation Framework Agreement (ECFA) could result in an
increase of $30 billion in two-way trade with the mainland.
He asserted that the primary motivation for the Mainland was
to demonstrate "good will" towards Taiwan since the ECFA and
other economic agreements disproportionately benefited
Taiwan. Tao Wenzhao, Senior Fellow at the Chinese Academy
of Social Sciences, was more measured in his assessment of
the talks, telling Emboffs April 29 that the agreements
merely represented a consensus to focus on economic issues.

Direct Flights Finalized
--------------


4. (C) After nearly a year of regular direct charter flights,
the Air Traffic Agreement paves the way for the establishment
of regularly scheduled direct flights and expands the number
of flights from 108 to 270 per week. In addition, the
agreement adds six more Mainland cities (Hefei, Harbin,
Nanchang, Guiyang, Ningbo, and Jinan) to the 21 already
included in the charter flight agreement. CIIS' Guo
predicted that one benefit of the agreement of regular direct
flights would be lower airfares, noting that the direct
charter flights were still more expensive than those that
include a stopover in Hong Kong or Macao. BTEA's Chen
pointed out that most in Taiwan were happy about the direct
flights and criticized Democratic Progressive Party (DPP)
Chair Tsai Ing-wen for calling the agreement a "failure"

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because it did not include fifth freedom rights. (Note: the
right to carry passengers from one country to a second
country and then on to a third country). Chen argued that
"no one was willing to touch" the issue of fifth freedom
because that involved sovereignty issues, an obviously
contentious topic. Tao commented that the two sides agreed
in 2005 to call the flights "cross-Strait," thereby avoiding
the contentious question whether they were "domestic" or
"international." (Note: There is no indication that China or
Taiwan would treat the routes as anything but domestic for
purposes of their respective civair relations with third
countries. End Note.)

Financial Cooperation Broadened
--------------


5. (C) The Financial Cooperation Agreement establishes a
supervision mechanism to oversee the mutual establishment of
banks and business services. It also paves the way for
currency exchange between the Renminbi and the New Taiwan
Dollar, which had been limited to 20,000 RMB (USD 3000) per
transaction for personal accounts only, and lifts some caps
on mainland investment in Taiwan. Guo said the agreement on
financial cooperation represented Taiwan's acceptance in
principle of "normalization" of economic and trade relations.
He predicted that initially the pact will be a boon to
Taiwan businesses in the Mainland by allowing them a means to
exchange currency and have access to Taiwan-based financial
services. Chen agreed, saying Taiwan businesses were happy
that the 20,000 RMB limit on personal currency exchange will
be eliminated.


6. (C) Chen explained that the Financial Cooperation
Agreement raised the limit on mainland investment in Taiwan
businesses from 20 percent to 40 percent and suggested this
would be raised again to 51 percent by the end of 2009.
According to newspaper reports, Taiwan currently limits
mainland investment to the real estate sector but, with this
agreement, will now allow participation in the manufacturing
and service sectors. However, Mainland investment will not
be permitted in LED screen production, semi-conductors and
other sensitive high-tech industries. Tao Wenzhao commented
that that the Mainland would be very cautious in its
investment, especially from state-owned enterprises, to avoid
stoking fears on Taiwan that the PRC was trying to "buy
Taiwan."

No More Government Restrictions on Chinese Procurement
-------------- --------------


7. (C) The Financial Cooperation Agreement also eliminates
the mainland's restriction on procuring products directly
from Taiwan companies. Chen predicted this would give a boost
to Taiwan's economy. As an example, Chen said the mainland
could now designate Taiwan as a provider of pipeline
materials for infrastructure assistance projects in Africa.
This would be a minor decision for the mainland but would
have a significant impact on Taiwan's economy, he said.
(Note: There is no indication that China would treat Taiwan
firms as domestic under its government procurement law. End
Note).

Extradition of Taiwan Economic Criminals
--------------


8. (C) Guo Zhenyuan said the Anti-Crime Agreement should help
Taiwan extradite organized crime figures who have fled to the
Mainland. He said that there were few, if any, Mainland
criminals on Taiwan, as most corrupt Mainland officials fled
to North America or Europe. Guo noted the Anti-Crime
Agreement had significant political implications because it
compelled the two sides' legal systems to work together.
Chen agreed that the main concern for Taiwan was economic
criminals hiding on the Mainland. He pointed out, however,
that the agreement only deals with "middle to large" cases
and that the PRC would agree to extradite the criminals only
on a case-by-case basis. Some Taiwan fugitives facing
charges back home have spent a lot of money in the Mainland
currying political favor. It was unlikely, he assessed, that
the PRC would agree to send these well-connected individuals
back to Taiwan to face justice. CASS's Tao disagreed,
however, speculating that some high-profile Taiwan criminals
might be extradited to show the PRC's sincerity in honoring
the agreement.

ECFA Would be the Biggest Prize
--------------


9. (C) A major accomplishment of the ARATS-SEF meeting was
the announcement to start talks on an ECFA, Beijing contacts

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remarked. Guo pointed out that the Mainland's interest in
starting ECFA discussions signified PRC willingness to
accommodate Taiwan, regardless of what the agreement was
called, as long as it was conducive to the development of
cross-Strait relations. Chen admitted that Taiwan businesses
had been "envious" of Hong Kong and Macao for their
Comprehensive Economic Partnership Agreement (CEPA) with the
Mainland because of the benefits such agreements had accrued
to the respective economies. Despite protests to the
contrary, Taiwan was pursuing a similar deal with the
mainland, Chen opined. Chen said the entry into force of the
ASEAN plus 3 free trade area in 2010 made it "extremely
urgent" for Taiwan to conclude an ECFA with the Mainland by
the end of this year. He asserted that it was "unthinkable"
for this not to take place as it would be be very damaging to
Taiwan's economy and would "isolate" Taiwan from the rest of
Asia. He said that his association was working very hard to
lobby the Taiwan government on this point.


10. (C) Chen expected an ECFA to be tantamount to an "unequal
treaty" in that Taiwan would benefit from the agreement far
more than the Mainland. He asserted that for the Mainland
"the symbolic importance of the agreement outweighs economic
considerations." For this reason, he predicted, the Mainland
would have no limit on Taiwan exports to the mainland, but
Taiwan would restrict Mainland agricultural imports and
labor. Guo and Tao separately agreed that the Mainland was
not going to insist on specific concessions for Taiwan market
access because of its interest in building a peaceful
development framework that would eventually lead to political
integration. Tao insisted, however, that there was no
timetable or specific plan for achieving that, other than it
is a "goal for the 21st century." Chen admitted that the
fact that Beijing was willing to accept the ECFA on possibly
unfavorable economic terms gave the DPP some ammunition to
say that Beijing was seeking the agreement as part of its
effort to integrate the economies as a prelude to political
reunification. Chen said that, in fact, an ECFA would make
it very difficult for Taiwan to distance itself politically
from the Mainland in the future.

Politics Still An Issue
--------------


11. (C) Our contacts saw the domestic political situation in
Taiwan as the biggest impediment to signing the ECFA. Chen
said in addition to DPP opposition, all the ministries in
Taiwan would be involved in the ECFA process and the
Legislative Yuan might demand the right to ratify the
agreement, which could complicate the issue. Chen argued,
however, that the DPP's opposition to ECFA would not help it
politically in Taiwan because of what he believed would be
widespread support for the measure. He said the DPP was
unwittingly helping Ma Ying-jeou, making it easier for him to
demand special treatment for Taiwan from the Mainland to make
an ECFA more politically palatable. Guo Zhenyuan expressed
frustration with Ma in "yielding too easily" to opposition
pressure. He asserted that most polls showed 60-70 percent
support for the agreement, and that Ma should stick to his
position.


PICCUTA