This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 TAIPEI 001191 
 
SIPDIS 
 
DEPARTMENT PASS AIT/W AND USTR 
 
DEPARTMENT FOR EAP/RSP/TC 
 
USTR FOR SCOTT KI 
 
USDOC FOR 4430/ITA/MAC/EAP 
 
TREASURY FOR OASIA - WISNER 
 
E.O. 12938: N/A 
TAGS: EINV ECON EFIN TW CH
SUBJECT: CROSS-STRAIT INVESTMENT SURGES 51.1 
PERCENT IN 2004 
 
REF: 03 TAIPEI 3930 
 
SUMMARY 
------- 
 
¶1.  Taiwan's investment in the PRC rose by 51.1 
percent in 2004 accounting for 67 percent of overall 
outbound investment from the island according to 
statistics from the Ministry of Economic Affairs 
(MOEA).  Both the number of investment projects and 
their average value increased.  However, PRC data 
indicate that contracted investment -- dollars 
actually spent -- fell by 7.7 percent compared to 
¶2003.  Taiwan investors have concentrated by industry 
in specific regions in the PRC, especially in the 
Yangtze and Pearl River Deltas.  These industrial 
clusters offer new opportunities for Taiwan firms, 
but at the same time they offer opportunities for PRC- 
owned firms to develop and become more competitive. 
End summary. 
 
China Takes 2/3 of Outward Investment 
-------------------------------- 
 
¶2.  According to the Ministry of Economic Affairs 
(MOEA), Taiwan's approved mainland investment in 2004 
rose sharply by 51.1 percent to USD 6.94 billion. 
This marked the highest percentage increase since 
2000 and the third highest increase since MOEA began 
tracking the data in 1991.  Despite continuing 
government efforts to encourage businesses to 
diversify the places where they invest, more than 67 
percent of outward investment during the period went 
to Mainland China.  Some officials and analysts 
believe a more accurate figure would be 75 percent 
because many Taiwan investments in the PRC pass 
through third areas like British Virgin Islands and 
British Cayman Islands to evade Taiwan government 
controls or Taiwan taxes.  Cumulative MOEA approved 
investment in the PRC as of December 31, 2004 was up 
20.2 percent to USD 41.3 billion from the 2003 
yearend level of USD 34.3 billion. 
 
Bigger Investments and More of Them 
----------------------------------- 
 
¶3.  The remarkable 51.1 percent increase in approved 
investment is due both to an increase in the number 
of projects approved and the higher average value of 
approved investments.  Both broke new records with 
2,004 projects approved and an average size of USD 
3.46 million.  Some of the firms approved for 
particularly large projects include Taiwan 
Semiconductor Manufacturing Company (TSMC) (USD 371 
million), Hon Hai Precision (USD 68 million), AU 
Optoelectronics (USD 100 million, two projects), Hsin 
Ta Cement (USD 60 million) and Formosa Plastics (USD 
69 million). 
 
PRC Data - More Contracted, Less Realized Investment 
--------------------------------------------- ------- 
 
¶4.  PRC investment data showed that although the 
contracted value of Taiwan's new mainland investment 
in 2004 grew, the value of realized investment -- 
dollars actually spent -- dropped for the year. 
According to PRC data, contracted investment rose 
more modestly than the MOEA approved data figures, 
with growth of 8.7 percent to USD 9.31 billion.  For 
realized value, PRC figures show a drop of 7.7 
percent from 2003 to USD 3.12 billion.  The 
cumulative totals by contract value and realized 
value as of December 31, 2004, were USD 79.33 billion 
and USD 39.62 billion, respectively.  The drop in 
realized investment could be explained by a number of 
different factors that may have encouraged Taiwan 
businesses to postpone planned investments.  These 
include the PRC's tightened macroeconomic controls, 
uncertainly about the future of the Renminbi exchange 
rate, and persistent power shortages in the PRC. 
 
Industry Clustering 
------------------- 
 
¶5.  According to MOEA statistics, nearly 79 percent of 
Taiwan's mainland investment was made in the Pearl and 
Yangtze River Delta (including Shanghai metropolitan 
area).  Over 56 percent of mainland investment was in 
electronics and electrical equipment (mainly IT 
hardware manufacturing), basic metals, plastic products 
and chemicals manufacturing.  These figures only 
partially reflect the degree to which Taiwan's 
investment has clustered by industry in specific areas 
of the PRC.  A recent survey by Chung-hua Institute for 
Economic Research (CIER), a leading economic research 
institute in Taiwan, underscored how Taiwan's 
investment in plastic-product manufacturing has 
concentrated in Guangdong to take advantage of a well- 
established supply chain.  Electronics and electrical 
equipment manufacturers have also concentrated in 
Guangdong but are increasingly migrating to Jiangsu and 
Zhejiang. 
 
¶6.  Clustering has facilitated the development of local 
suppliers with the result that Taiwan investors 
increasingly rely on inputs produced in the PRC instead 
of importing those inputs from Taiwan.  Appreciation of 
the New Taiwan Dollar may further encourage this trend. 
Taiwan's Minister of Economic Affairs Ho Mei-Yueh has 
argued that the PRC has used industrial clustering to 
encourage the development of PRC-owned IT firms and 
warns of increasing competition for Taiwan firms.  As 
some observers point out, industrial clusters in the 
PRC offer Taiwan firms both the opportunity to take 
advantage of a favorable investment environment and the 
challenge of a rising new center for competition. 
 
¶7.  MOEA statistical data on approved cross-strait 
investment can be downloaded at 
http://2k3dmz2.moea.gov.tw/gnweb/english/e_ma in.aspx? 
Page=D at the link to "D-6 Approved Indirect Mainland 
Investment." 
 
PAAL