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Cablegate: Taiwan Investment in China Grows

VZCZCXRO7983
RR RUEHGH
DE RUEHIN #3156/01 2551038
ZNR UUUUU ZZH
R 121038Z SEP 06
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 2088
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3406
RUEHBJ/AMEMBASSY BEIJING 5645
RUEHUL/AMEMBASSY SEOUL 8080
RUEHGP/AMEMBASSY SINGAPORE 6599
RUEHKO/AMEMBASSY TOKYO 8014
RUEHML/AMEMBASSY MANILA 9799
RUEHJA/AMEMBASSY JAKARTA 3921
RUEHKL/AMEMBASSY KUALA LUMPUR 3560
RUEHHI/AMEMBASSY HANOI 3127
RUEHBY/AMEMBASSY CANBERRA 4309
RUEHWL/AMEMBASSY WELLINGTON 1555
RUEHHK/AMCONSUL HONG KONG 6856
RUEHGH/AMCONSUL SHANGHAI 0368
RUEHGZ/AMCONSUL GUANGZHOU 9547

UNCLAS SECTION 01 OF 03 TAIPEI 003156

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USTR
STATE FOR EAP/ TC, EAP/EP
USTR FOR STRATFORD, ALTBACH

USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT
TREASURY FOR OASIA/LMOGHTADER
TREASURY PLEASE PASS TO OCC/AMCMAHON
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN

E.O. 12958: N/A
TAGS: EINV EFIN ECON PINR TW
SUBJECT: TAIWAN INVESTMENT IN CHINA GROWS


Summary
-------

1. (SBU) Taiwan's approved investment in China in the first half of
2006 shot up 35.2 percent from the corresponding period in 2005,
totaling USD 3.56 billion and reversing a one-year decline. Much of
the investment comes from firms expanding existing China operations.
This strong growth suggests Taiwan efforts to encourage firms to
diversify overseas investment are not succeeding. End summary.

Taiwan's first half investment in China surges
--------------------------------------------- -

2. (U) Taiwan's approved investment in China in the first half of
2006 grew 35.2 percent from the corresponding period of 2005,
totaling US$3.56 billion, according to Taiwan's Ministry of Economic
Affairs Investment Commission (IC). The strong growth reversed a
13.5-percent annual decline in 2005 and put total investment for
2006 on track to beat 2004's record of US$6.94 billion. Despite
efforts by authorities to encourage businesses to diversify their
investment, the PRC continued to be the predominant destination for
Taiwan foreign investment. It accounted for 66.9 percent of
Taiwan's total outward foreign direct investment (FDI), down
slightly from 71.1 percent for all of 2005.

Approved Amount Percent of
Period Cases (US$ billion) Total FDI
------ ----- --------------- ----------
2006 Jan-Jun 519 3.56 66.9%
2005 Jan-Jun 651 2.63 68.7%
2005 Total 1,297 6.01 71.1%

East and South China Still Dominate
-----------------------------------

3. (U) The Yangtze and Pearl River Deltas continue to be the main
destinations for Taiwan investment in the PRC. Jiangsu Province
took the lead to with over 38 percent of Taiwan's investment in the
Mainland, followed by Guangdong, Shanghai City, Zhejiang, and
Fujian. Together the five top areas accounted for 91 percent of
Taiwan's China investment, the same proportion they held in 2005.
The following chart shows the number of approved cases for each
province with the total amount of approved investment:

-- Approved Amount Percent of
Location Cases (US$ million) Total
-------- ----- --------------- ----------
Jiangsu 144 1,365 38.4%
Guangdong 124 717 20.2%
Shanghai 81 534 15.0%
Zhejiang 27 389 11.0%
Fujian 73 233 6.6%
Others 70 317 8.9%
PRC Total 519 3,556 100.0%

Electronics Continue to Lead
----------------------------

4. (U) Electronic goods, components and machinery accounted for more
than 48 percent of Taiwan's investment in the Mainland during the
first half of the year. Investment in computers, communications and
audio/video equipment manufacturing was the largest single category
with approved investment valued at US$797 million, a 67.7 percent
increase over the previous year. The top ten categories were all in

TAIPEI 00003156 002 OF 003


manufacturing industries, accounting for 80 percent of total
investment. The following chart shows Taiwan investment data for
the top ten industrial categories:

-- Amount Percent
Industry Cases (US$ mil.) of Total
-------- ----- ---------- --------
Computers, Telecom.
A/V equipment 53 797 22.4%
Electronic components 23 568 16.0%
Electrical machinery 75 371 10.4%
Precision, optical
--medical equipment 23 219 6.2%
Chemicals 27 182 5.2%
Non-metallic minerals 10 178 5.0%
Metals and metal goods 34 161 4.6%
Plastic products 26 141 4.0%
Machinery 40 125 3.5%
Textiles 24 115 3.3%
Others 184 696 19.6%
Total 519 3,556 100.0%


Expanded Investments Play Important Role
----------------------------------------

5. (U) The strong growth in PRC investment appears to be due in
large part to expansion of previous investment projects, rather than
new projects by first-time Taiwan investors in the PRC. Many of
these investments were financed by revenue generated in the PRC.
Ten projects by nine large Taiwan firms with major existing
investments in the PRC accounted for about 12 percent of total
investment. These are Honhai Electronics (US$100 million), Chi-Mei
(two projects of US$60 million and US$30 million), Asustek Computer
Inc. (US$50 million), Promate Electronics (US$50 million), and
Gigabyte Technology (US$50 million), Formosa Chemicals and Fibre
Corp. (US$40 million), Topply (US$20 million), and UniPresident
Group (US$40 million).

PRC Data - Smaller Decline than 2005
------------------------------------

5. (U) PRC data on Taiwan investment showed a different picture.
PRC Ministry of Foreign Commerce data showed that Taiwan realized
investment (dollars actually spent versus approved or contracted
investment) actually fell 12.2 percent in the first half of 2006
from the same period last year. This decline was smaller than the
31.1 percent decline for 2005. The total value of realized
investment in the first six months of 2006 was US$1.03 billion.
However, the PRC data for contracted Taiwan investment showed a 15.6
percent increase to US$5.52 billion.

Comment - Diversification Efforts Unsuccessful
--------------------------------------------- -

6. (SBU) Except for the decline in realized Taiwan investment in
China shown in the PRC data, the rest of the story is one of
continued strong interest by Taiwan enterprises in expanding
existing operations in China. Energy shortages, rising land and
labor costs, macro-economic controls and uncertainty about the
Renminbi's future exchange rate appear to be doing little to slow
Taiwan investment in the Mainland. Taiwan authorities continuing
efforts to encourage firms to diversify overseas investment also
appear to be making little headway.

TAIPEI 00003156 003 OF 003

YOUNG

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