US embassy cable - 05TAIPEI2521

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 002521 
 
SIPDIS 
 
DEPT FOR EAP/TC 
DEPT PLEASE PASS AIT/W 
 
E.O. 12958: DECL: 06/07/2015 
TAGS: ECON, EINV, PREL, ETTC, CH, TW, Cross Strait Economics 
SUBJECT: CROSS-STRAIT INVESTMENT - STILL WAITING FOR THE 
RIGHT MOMENT FOR LIBERALIZATION 
 
REF: A. TAIPEI 343 
     B. TAIPEI 1376 
     C. TAIPEI 2434 
 
Classified By: AIT Director Douglas H. Paal, Reason 1.4 d 
 
Summary 
------- 
 
1. (C) Taiwan government plans to liberalize regulations on 
investment in the Mainland continue to suffer delay. 
Despite the recent announcement that Taiwan would modestly 
relax investment capital ceilings, Mainland Affairs Council 
(MAC) and Ministry of Economic Affairs (MOEA) Investment 
Commission officials indicate that implementation will not 
happen soon.  According to these officials, approval of 
investment in the semiconductor packaging and testing 
industry and small-size TFT-LCD manufacturing will be 
announced in the coming months, repeating predictions made 
twice before this year.  Restrictions on the level of 
technology that Taiwan firms are permitted to use in 
Mainland-based semiconductor manufacturing may suffer 
additional political delays.  However, efforts to improve 
the enforcement of existing regulations continue.  Further 
investment liberalization appears to depend almost entirely 
on Taiwan's domestic political environment and other 
external events like the PRC's Anti-Secession Law.  Many of 
the economic, technology and security issues have already 
been resolved.  Taiwan firms will continue to suffer the 
burden imposed by these regulations until an opportune 
political moment arrives for liberalization.  End summary. 
 
Investment Ceilings - Premature Announcement 
-------------------------------------------- 
 
2. (U) On May 24, Taiwan media reported that Huang Chin- 
tan, Director of Taiwan's Ministry of Economic Affairs 
(MOEA) Investment Commission, had revealed plans under 
consideration for modest relaxation of the limits on the 
amount of capital Taiwan firms can invest in the PRC.  As 
reported ref C, The plan would allow any firm to invest up 
to 40 percent of the firm's net worth in the PRC regardless 
of the firm's size.  Large Taiwan firms are now subject to 
a sliding scale restriction of 20 to 40 percent of net 
worth depending on the size of the firm. According to the 
current regulations, large firms are allowed to invest up 
to 40 percent of their net worth for the first NT$ 5 
billion (USD 160 million); 30 percent of net worth between 
NT$ 5 billion and NT$ 10 billion (USD 320 million); and 20 
percent of net worth over NT$ 10 billion. Small and medium 
enterprises are limited to investment of up to NT$ 80 
million (about USD 2.5 million). 
 
3. (SBU) Reports differ on how many firms might benefit 
from this reform.  Even different Taiwan government 
agencies have varying estimates.  IC's Huang told AIT/T 
that only 30 firms listed on Taiwan' stock exchange have 
reached or exceeded the investment limit and a few dozen 
more were nearing the limit.  Mainland Affairs Council 
Economics Department Director Fu Don-cheng indicated that 
130 firms had reached the ceiling.  (Comment: Regardless of 
which estimate is more accurate, AIT/T believes that this 
small, incremental reform is unlikely to have a major 
impact on Taiwan firms' ability to invest in the PRC. 
Neither is it likely to increase the attractiveness of 
Taiwan as a base for foreign firms wishing to manage 
regional operations from a Taiwan subsidiary.  End 
comment.) 
 
4. (C) Both Fu and Huang reported that the announcement was 
premature.  Huang denied that he had leaked the proposal 
and blamed another government agency.  He added that his 
agency was initially reprimanded by Premier Hsieh's office 
for revealing the proposal.  He said that the Premier would 
eventually make such an announcement when the timing was 
right.  Fu noted that the move would require several 
supporting measures that would also need further 
consideration.  Among the supporting measures he mentioned 
were changes in the investment review process, regulations 
on technology control, and increased information-reporting 
requirements for the investing firms.  (Comment: The 
supporting measures that Fu described seem excessive given 
Taiwan's current regime and suggest that Fu strongly wished 
to reduce expectations of quick movement on this 
initiative.  End comment.) 
Industry Categories - Predicting Progress in Months...Again 
--------------------------------------------- -------------- 
 
5. (C) Taiwan continues to postpone expansion of the 
industry categories approved for investment in the 
Mainland.  Long-awaited approval for investment in 
semiconductor packaging and testing and the manufacture of 
small-size TFT-LCD panels has been postponed once again. 
As reported refs A and B, MAC's Fu told AIT/T in January 
these two categories would be liberalized within the 
following two months.  In late-March, he indicated they 
would be approved in late May.  In a May 27 meeting he made 
a similar prediction, saying that the two categories would 
be approved within the next two to three months. 
Similarly, IC's Huang predicted that semiconductor 
packaging and testing would be approved by the end of June. 
Small-size TFT-LCD liberalization would come sometime later 
but before the end of the year. 
 
6. (C) The potential for further liberalization of 
semiconductor manufacturing is even less clear.  Taiwan's 
semiconductor firms have been pushing the government to 
allow investment in more advanced manufacturing processes. 
Currently, Taiwan firms are only permitted to invest in 
manufacturing that produces semiconductors with feature 
size no finer than 0.25 microns.  Taiwan is considering 
permitting investment at the 0.18-micron level.  While IC's 
Huang indicated to AIT/T that this would be formally 
approved by the end of June, MAC's Fu would not speculate 
on the timing.  He emphasized that because it is such a 
critical industry for Taiwan, political sensitivities would 
continue to complicate liberalization.  (Comment: Fu in his 
position at MAC is likely to have a clearer picture of the 
cross-Strait political implications that will impact this 
decision than Huang in the more technical IC.  End 
comment.) 
 
Effective Management - Working on It 
------------------------------------ 
 
7. (C) Econoff asked both Huang and Fu about progress in 
the Taiwan government's efforts to strengthen the 
"effective management" component in its overall "active 
opening, effective management" strategy for cross-Strait 
economic relations.  Fu indicated that several Taiwan 
agencies were engaged in this effort, trying to improve the 
management of numerous aspects of cross-Strait relations, 
such as stronger enforcement of investment restrictions, 
improved monitoring of PRC visitors in Taiwan, and better 
control of indirect cross-Strait transportation links.  He 
said that these agencies continue their efforts to enhance 
the effective implementation of cross-Strait policies and 
reduce violations. 
 
8. (C) Huang agreed the Taiwan government, including his 
agency, continued to seek ways to enhance these kinds of 
enforcement measures.  The IC is developing new evaluation 
mechanisms to identify small Mainland investments by the 
same firm that may cumulatively exceed total investment 
restrictions.  He also commented that some recent high- 
profile investment investigations were a key component in 
the effective management policy.  According to Huang, the 
investigation of United Microelectronics Corporation for 
illegal investment in its Mainland competitor He Jian and 
the IC's recent fine of Robert Chang, chairman of PRC 
semiconductor foundry Semiconductor Manufacturing 
International Corporation (SMIC), were examples of this 
kind of action. 
 
Comment - Always Waiting for the "Perfect Moment" 
--------------------------------------------- ---- 
 
9. (C) AIT/T discussions with MAC and IC underscore the 
fact that the Chen Administration is once again holding 
back cross-Strait liberalization measures for that elusive 
"perfect moment."  Fu described in detail the string of 
events that have pushed back liberalization in the last few 
months including the PRC's passage of the Anti-Secession 
Law and the Lien and Soong visits.  He emphasized the need 
for an internal Taiwan consensus on how to approach cross- 
Strait economic issues.  His comments and the repeated 
delays highlight the fact that the Chen administration is 
letting external events and political maneuvering 
completely control the agenda on these liberalization 
issues of critical importance to Taiwan's economy, or 
perhaps simply blaming these factors for its political or 
ideological unwillingness to improve cross-Strait economic 
ties. 
 
10. (C) Taiwan firms are paying the price for the delay. 
This is most obvious with regard to the industry and 
technology restrictions on investment.  Semiconductor 
manufacturers, packaging and testing firms and TFT-LCD 
producers all face similar situations.  PRC competitors are 
growing, some Taiwan firms appear to be circumventing 
regulations, and other foreign competitors are increasing 
their presence in the Mainland.  If these sectors are not 
liberalized soon, Taiwan firms that observe the law will be 
at a major disadvantage in competing with other world-class 
manufacturers in establishing a base in the growing 
Mainland market.  These most recent conversations with Fu 
and Huang reconfirm what Taiwan officials have been 
suggesting for months - the technical aspects regarding 
these measures have already been decided.  The economic, 
technology and security concerns have been resolved.  The 
measures are now only waiting for "a perfect political 
moment."  Unless that moment comes soon, it may not arrive 
in time for Taiwan's businesses.  Previous delays do not 
encourage hope.  End comment. 
PAAL