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Cablegate: Taiwan Investors Lament Changing Investment Environment In

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RR RUEHCN RUEHGH RUEHVC
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R 310215Z OCT 07
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 6597
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASH DC
RUCPDOC/DEPT OF COMMERCE WASHDC
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UNCLAS SECTION 01 OF 02 GUANGZHOU 001180

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SENSITIVE
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TAGS: EINV ETRD ELAB SENV TW CH
SUBJECT: Taiwan Investors Lament Changing Investment Environment in
Pearl River Delta


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1. (SBU) Summary: Taiwan investors in Dongguan complain that China's
new Labor Law, rising wages, and policies aimed at directing
labor-intensive and highly-polluting industries away from coastal
regions are harming the investment environment in the Pearl River
Delta. However, even with these downsides and the closure of as
many as 5,000 enterprises with Hong Kong and Taiwan investment, some
still find Dongguan and other areas in China to be attractive
options for investment. End summary.

Labor-Intensive Industries Squeezed
-----------------------------------

2. (SBU) During lunch with Congenoffs, Taiwan investors in
Guangdong's Dongguan municipality, about an hour outside of
Guangzhou to the south in the Pearl River Delta, said that the
combination of China's new Labor Law, a tightening labor market in
the Pearl River Delta, and new policies aimed at influencing
investment patterns had reduced the flow of foreign investment.
(Note: Dongguan is one of China's largest centers of Taiwan
investment. The Dongguan Taiwan Businessmen's Association (TBA)
estimates that there are more than 100,000 Taiwan residents, about
6,500 registered Taiwan companies and many unregistered Taiwan
businesses in the municipality. End note.) Samuel Kuo, the chair
of the Dongguan TBA and Samson Group, told us that as many as 5,000
enterprises, mainly Hong Kong and Taiwan-owned companies, have
closed down in the area recently. In addition, many are considering
moving to other parts of China. He said that efforts to replace
labor-intensive industries in the area with high-tech investment
had, in the meantime, been slow to yield results. Kuo explained
that competition for high-tech investment in China was fierce
because cities in west and central China also sought to attract such
investment in an attempt to leap-frog growth led by labor-intensive
industries.

Labor Law Adds Costs to Rising Wages
------------------------------------

3. (SBU) Phillip Lee, Dongguan TBA's vice chair and owner of Jorden
Furniture Manufacture Co., called China's new Labor Law the biggest
challenge for investors in south China. He argued that the law was
biased against employers as it placed new obligations on them
without offering any new benefits. He complained in particular
about a requirement to give compensation to employees who resign
regardless of the reason for their departure. Lee said it would be
difficult to estimate the costs imposed by the new requirements, but
Kuo speculated it would raise total labor costs by 10 to 20 percent.


4. (SBU) Kuo pointed out that these increased costs would come on
top of already rising wages in the Pearl River Delta. As other
parts of China develop economically, fewer and fewer migrant
laborers come to Dongguan, he explained. According to Kuo and his
TBA colleagues, it not only takes higher wages to find new workers,
it also takes longer to recruit them.

And More Investment-Discouraging Policies
-----------------------------------------

5. (SBU) The Taiwan executives cited other policy changes that have
burdened investors. Kuo commented that changes in the value-added
tax (VAT) rebate regulations and new guarantee requirements for
export processors would have a substantial impact on Taiwan firms in
Dongguan. Tony Lin, another TBA vice chair and president of Ya Hsin
Electronics, complained of new policies that discourage investment
in highly-polluting industries. He told Congenoffs that it was no
longer possible to get licenses to build printed circuit board
factories in Dongguan or elsewhere in the Pearl River Delta due to
concerns about environmental impact. Kuo also noted that benefits
Taiwan investors used to enjoy -- like tax holidays -- were a thing
of the past.

But the PRD Is Still Attractive
-------------------------------

6. (SBU) Nevertheless, Kuo said that he would not move his business
away from Dongguan. Kuo's firm, which makes wood furniture, is in
one of the industries affected by VAT rebate changes and new rules
for export processing. The United States is his major market and
most of his products are made from imported wood, including wood
from the United States. He acknowledged that some Taiwan firms are

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moving to alternative low-wage locations such as Vietnam or
Indonesia, but he believes that China is still the best place for
investment. In addition to superior infrastructure, Kuo claimed
that areas like Dongguan and Shanghai have governments that know how
to work with foreign investors.

Comment - Chilling Effect, but Not a Freeze
-------------------------------------------

7. (SBU) The comments of Taiwan investors in Dongguan suggest that
central government policies intended to redirect labor-intensive and
highly-polluting industries away from coastal provinces are being
implemented at the local level to some effect. However, despite
complaints, at least some investors, even in industries targeted for
redirection, still find the Pearl River Delta an attractive
destination.

GOLDBERG

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