US embassy cable - 05TAIPEI3154

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 003154 
 
SIPDIS 
 
DEPT FOR EAP/TC 
PLEASE PASS AIT/W 
 
E.O. 12958: DECL: 07/26/2015 
TAGS: ECON, EINV, TW, CH 
SUBJECT: CROSS-STRAIT INVESTMENT 1ST HALF OF 2005 - MOVING 
AND POSSIBLY SLOWING 
 
REF: A. 04 TAIPEI 3930 
 
     B. TAIPEI 1191 
 
Classified By: AIT Director Douglas H. Paal, Reason 1.5 d 
 
Summary 
------- 
 
1. (C) Taiwan government data on Taiwan investment in the 
PRC showed that the total value of investment for the first 
six months of 2005 fell by 22 percent.  While investment 
fell substantially in the Yangtze and Pearl River Deltas 
and Fujian Province, which have been the destinations of 
the vast majority of Taiwan investment, it rose in 
provinces farther north and west, especially Shandong, 
Sichuan and Guangxi.  Investment fell sharply in 
electronics manufacturing but increased in mining 
(including cement manufacturing), warehouses, finance and 
insurance and construction.  Although the data suggest that 
Taiwan approved investment in the PRC may have peaked last 
year, this could be because Taiwan firms have instead begun 
reinvesting profits earned in the Mainland.  If so, it does 
not mean that economic cross-Strait links have stopped 
growing.  In fact, the increase in investment farther 
upstream in the supply chain and in services could suggest 
more profound economic integration across the Taiwan 
Strait.  End comment. 
 
Slowing Overall? 
---------------- 
 
2. (U) Taiwan Ministry of Economic Affairs Investment 
Commission (IC) data on approved Taiwan investment in the 
PRC for the first six months of 2005 suggest that 
investment levels may be starting to fall.  The first half 
of 2005 showed 651 approved investment cases worth a total 
of USD 2.6 billion.  This represented a 22 percent decline 
in value from 1,074 cases totaling USD 3.4 billion during 
the first six months of 2004.  PRC data for the first 
quarter of the year also showed declines for both 
contracted value of Taiwan investment in the PRC and 
realized value (total dollars actually spent).  They fell 
by 15.7 percent and 7.7 percent respectively.  (Note: PRC 
data for the second quarter are not yet available.  End 
note.) 
 
3. (C) The overall decline was probably caused by several 
factors.  Global economic factors are likely to have played 
a role, including expectations of slower global growth and 
higher oil prices.  Economic conditions in the PRC, 
including labor shortages and rising wages in the coastal 
provinces, energy shortages, and macro-economic controls 
aimed at slowing China's growth, may have also had an 
impact.  Tsai Horng-ming, Deputy Secretary General of the 
Chinese National Federation of Industry commented to AIT/T 
that many Taiwan firms accelerated their investment plans 
last year or even earlier to get in before appreciation of 
the Renminbi.  In addition, IC Executive Secretary Huang 
Chin-tan speculated that after several years of very high 
levels of Taiwan investment in the PRC, most Taiwan firms 
that want to invest there have already done so.  They may 
now be in a position to expand operations there using local 
revenue without applying for further permission from the 
Taiwan government. 
 
Moving North and West 
--------------------- 
 
4. (U) Although the Pearl and Yangtze River Delta areas and 
Fujian province continue to be the destination for the vast 
majority of Taiwan investment in the PRC, other provinces 
farther north and west saw major increases.  Together 
Guangdong Province, home of the Pearl River Delta; the 
Yangtze River Delta's Jiangsu and Zhejiang Provinces; and 
Fujian Province, just across the Strait from Taiwan, 
accounted for 89 percent of total Taiwan investment in the 
Mainland during the first six months of 2005.  However, the 
amount of investment declined compared to the same period 
last year by the following percentages: Zhejiang - 40 
percent, Jiangsu - 29 percent, Fujian - 29 percent and 
Guangdong - 8 percent.  This followed earlier declines in 
the yearly total for 2004 compared to 2003 for Jiangsu, 
Fujian and Guangdong.  Guangdong saw the sharpest decline 
in 2004 with a 32 percent decrease.  These results probably 
reflect increasing wages and energy shortages in the 
coastal provinces, which have seen more rapid economic 
growth. 
 
5. (U) Meanwhile, investment levels increased during the 
first half of the year compared to the same period in 2004 
for several provinces in the PRC's north-east and west. 
Shandong Province saw the highest growth both in the total 
increase in value and as a percentage change.  During the 
first six months of the year, Taiwan firms invested USD 75 
million in Shandong, compared to USD 28 million during the 
first half of 2004, representing a 160 percent increase. 
Other provinces with large percentage increases included: 
Sichuan - 35 percent, Guangxi - 31 percent, Hainan - 22 
percent, and Hebei - 14 percent. 
 
Heading Upstream 
---------------- 
 
6. (U) The first half of 2005 data also showed some signs 
that Taiwan investment in the PRC, previously characterized 
by the labor-intensive assembly of consumer goods for 
export to the United States, Europe and Japan, continues to 
move farther upstream and diversify into services. 
Electronics manufacturing still accounted for 44 percent of 
total investment during the period.  However, the total 
value of investment declined to USD 1.17 billion from USD 
1.71 billion during the first half of 2004, marking a 31 
percent decrease.  The industries with the highest 
percentage increase were mining (including cement 
manufacturing) with a 350 percent increase, warehouses with 
a 327 percent increase, finance and insurance up by 108 
percent, and construction up by 103 percent.  Notably, 
Taiwan investment in PRC apparel manufacturing rose by 65 
percent over the same period last year, probably due to 
Taiwan firms trying to take advantage of the elimination of 
textile quotas by the WTO starting this year. 
 
Comment - Investment Slowing, Integration Growing 
--------------------------------------------- ---- 
 
7. (C) The latest Taiwan data on investment in the PRC 
suggest annual investment levels approved by Taiwan's IC 
may have peaked last year.  However, as IC's Huang points 
out, this may in part be due to the ability of Taiwan firms 
to reinvest profits earned in the Mainland.  If so, it does 
not mean that economic cross-Strait links have stopped 
growing.  In fact, the trend toward more investment 
upstream and in services could suggest more profound 
economic integration across the Taiwan Strait.  End 
comment. 
 
8. (U) Taiwan Ministry of Economic Affairs IC data on 
Taiwan investment in the PRC will be posted on the AIT 
siprnet site at www.state.sgov.gov/p/eap/taipei/ and 
intranet site at taipei.state.gov. 
PAAL