US embassy cable - 05TAIPEI1080

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 001080 
 
SIPDIS 
 
DEPT FOR EAP/TC 
DEPT PLEASE PASS AIT/W 
 
E.O. 12958: DECL: 03/11/2015 
TAGS: ECON, EINV, EFIN, TW, CH, Cross Strait Economics 
SUBJECT: CROSS-STRAIT - UNILATERAL ECONOMIC LIBERALIZATION 
WILL SEND MESSAGE 
 
REF: A. TAIPEI 278 
     B. TAIPEI 709 
 
Classified By: AIT Director Douglas H. Paal, Reason 1.5 b/d 
 
Summary 
------- 
 
1. (C) In the positive atmosphere following the Lunar New 
Year charter flights, recent moves by the Taiwan government 
have suggested that it was on the verge of further 
liberalization across a range of cross-Strait economic policy 
areas.  These include the creation of an offshore 
dollar-denominated stock exchange aimed largely at Taiwan 
investors in the Mainland; legalization of investment in the 
PRC in more advanced semiconductor manufacturing, integrated 
circuit packaging and testing, small screen TFT-LCDs, and 
naptha crackers; as well as travel policy.  The 
Anti-Secession Law appears to have temporarily put a halt to 
further progress in these areas.  The speed with which 
progress resumes could help signal the degree of the Chen 
administration's commitment to pursuing a cross-Strait 
dialogue after passage of the Anti-Secession Law.  End 
summary. 
 
Window for Progress 
------------------- 
 
2. (U) The December 2004 Legislative Yuan election results, 
widely interpreted as a rejection of political extremism by 
the Taiwan electorate, and successful negotiation of Lunar 
New Year passenger charter flights created an atmosphere of 
optimism in cross-Strait relations.  In recent weeks, several 
moves by the Taiwan government had suggested that there was 
potential for more real progress on a range of cross-Strait 
economic issues.  In addition, to the competing proposals for 
expanding cross-Strait charter flights offered by both sides, 
the Taiwan government appears to have drawn closer to 
implementation of various unilateral economic liberalization 
measures. 
 
Areas for Improvement...Finance 
------------------------------- 
 
3. (U) On February 14, Taiwan's Financial Supervisory 
Commission (FSC) announced plans to create a U.S. 
dollar-denominated offshore stock market that would allow 
Taiwan companies in the Mainland to list in a Taiwan market 
and avoid caps imposed by the Taiwan government on Mainland 
investment.  Taiwan investors in the Mainland are eager for 
such opportunities.  It would contribute to Taiwan's efforts 
to develop the financial sector and become a regional 
financial center.  On February 24, the FSC revealed that it 
was nearing a decision to allow Chinese financial 
institutions to set up representative offices in Taiwan.  In 
addition, Taiwan for months has had plans to implement a 
pilot Renminbi exchange program on Taiwan-controlled Kinmen 
Island just off the Mainland coast. 
 
...Investment Policy 
-------------------- 
 
4. (C) As reported ref A, various Taiwan agencies had been 
actively considering proposals to loosen Taiwan's 
restrictions on semiconductor manufacturing investment in the 
PRC.  Taiwan's largest semiconductor firm TSMC had been 
particularly vocal in advocating reform in this area. 
Controversy surrounding Taiwan semiconductor manufacturer 
UMC's close links to Mainland semiconductor firm He Jian had 
increased pressure from some segments of the public to 
liberalize the regulations that many accused UMC of 
circumventing.  However, as reported ref B, TSU politicians 
recently used the threat of a rumored U.S. export control 
"downgrade" to pressure the Chen administration into 
maintaining current restrictions.  Currently, Taiwan does not 
permit investment that involves manufacturing chips with a 
feature size finer than 0.25 microns.  Our discussions with 
Ministry of Economic Affairs (MOEA) Investment Commission 
officials indicate that Taiwan has been looking at lowering 
this limit to the 0.18 micron level or possibly even lower. 
 
5. (C) Other industries have also been targeted for 
liberalization.  Many firms have expressed interest in 
investing in integrated circuit (IC) packaging and testing 
facilities, small-size TFT-LCDs, and naptha crackers.  Taiwan 
has a strong position in the global packaging and testing 
market.  Packaging and testing currently accounts for about 
15 percent of Taiwan's semiconductor industry revenues. 
However, with the rapid growth of the semiconductor industry 
in the PRC, Taiwan firms that observe the Taiwan regulations 
are being left out of this key segment and foreign firms are 
taking advantage of opportunities in the Mainland. 
Similarly, Taiwan has demonstrated strong competitiveness in 
the TFT-LCD industry, and moving less advanced manufacturing 
technologies, such as small-size screens, to the Mainland 
would help Taiwan firms maintain an advantage.  Mainland 
Affairs Council (MAC) contacts had indicated for months that 
Taiwan liberalization of IC packaging and testing and small 
TFT-LCDS panels was imminent.  Investment in naptha crackers 
has been restricted to date because of the size of the 
investment required.  However, Taiwan's petrochemical 
investment in the PRC has seen rapid growth and naptha 
crackers are a logical next step for Taiwan firms to expand 
their Mainland presence. 
 
...and Travel 
------------- 
 
6. (U) The Bureau of Immigration announced on February 24 
that tourists from the Mainland could visit Taiwan 
individually instead of only as part of a group tour.  Other 
proposals exist for further expansion of tourism 
opportunities, including through the "mini-links" that 
connect the islands of Kinmen and Matsu with the Mainland, 
and relaxation of regulations governing travel to Taiwan by 
PRC employees of Taiwan and multinational firms. 
 
Hostage to the Anti-Secession Law 
--------------------------------- 
 
7. (C) The PRC's proposed Anti-Secession Law appears to have 
at least temporarily closed this window of opportunity for 
further cross-Strait economic liberalization.  As Mainland 
Affairs Council (MAC) Senior Secretary Lee Li-Jane explained, 
proponents of liberalization continue to push MAC to further 
relax cross-Strait economic policies, but opponents of 
liberalization have ramped up their efforts and the pressure 
on MAC is intense right now.  MAC contacts have been 
reluctant to discuss various specific proposals until the 
final text of the Anti-Secession Law is clear.  Ministry of 
Economic Affairs Investment Commission Executive Secretary 
Huang Chin-tan told econoff that all investment 
liberalization plans are on hold now.  He is hopeful that the 
delay won't be long. 
 
8. (C) Chinese National Federation of Industries Deputy 
Secretary General Tsai Horng-ming predicts that the delay on 
 
SIPDIS 
cross-Strait economic liberalization measures will be brief. 
He pointed out to econoff that the attention span of the 
media is short and the public is forgetful.  Institute for 
National Policy Research Executive Director Lo Chih-Cheng 
agreed that the delay for further unilateral liberalization 
as well as bilateral efforts such as charter flights could be 
very short.  He emphasized that the duration will depend on 
the response of the Chen administration.  If it is able to 
moderate its reaction and prevent a strong counter-response 
from the PRC, the two sides may avoid a vicious cycle that 
would wipe out the positive atmosphere of a month ago and 
force cross-Strait relations into a longer slump. 
 
Comment ) Taiwan's Message 
-------------------------- 
 
9. (C) The momentum for improved cross-Strait relations in 
February was real.  Taiwan's leadership must consider its 
next steps cautiously or risk squandering that momentum.  The 
PRC's recent unilateral offer to move toward opening its 
market to Taiwan agricultural goods suggests that it wants to 
mitigate the harsh negative reaction to the Anti-Secession 
Law from the international community and offer positives 
incentives for dialogue even as it appears to draw a harder 
line.  Similarly, unilateral economic liberalization measures 
on the part of Taiwan could play a more important role in the 
cross-Strait dialogue in the coming months.  Consciously or 
not, the Taiwan government will send a message on its real 
intentions with regard to the cross-Strait relationship in 
the wake of the Anti-Secession Law by the speed with which it 
resumes implementation of some of these unilateral measures. 
If allowed to proceed with minimal delay, these types of 
measures would increase the credibility of the Chen 
administration's openness to enter a dialogue with the PRC, 
even if the heat of Taiwan's rhetoric rises.  End comment. 
PAAL