VZCZCXRO6647
RR RUEHCN RUEHGH RUEHVC
DE RUEHIN #0516/01 0650950
ZNR UUUUU ZZH
R 060950Z MAR 07
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 4343
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC
RUEHOO/CHINA POSTS COLLECTIVE
RUEAIIA/CIA WASHDC
RHEFDIA/DIA WASHINGTON DC

UNCLAS SECTION 01 OF 02 TAIPEI 000516 
 
SIPDIS 
 
SIPDIS 
 
STATE PASS USTR 
STATE FOR EAP/ TC, EAP/EP 
COMMERCE FOR 3132/USFCS/OIO/EAP/WZARIT 
TREASURY FOR OASIA/LMOGHTADER 
USTR FOR STRATFORD, ALTBACH 
 
E.O. 12958: N/A 
TAGS: EINV ECON ETRD PREL CH TW
SUBJECT: Taiwan Survey Shows Deeper Economic Integration 
 
 
¶1.  Summary:  Taiwan's Chinese National Federation of Industries 
(CNFI) latest survey of Taiwan investors in China suggests the scale 
of investment in the PRC is rising.  Investors are increasingly 
focused on the domestic Mainland China market.  The highest policy 
priority for firms surveyed is direct cross-Strait transportation 
links.  End summary. 
 
¶2.  The Chinese National Federation of Industries, one of Taiwan's 
largest business associations, released its latest survey of members 
with investment in China.  The survey addresses the investment 
climate in Mainland China and offers policy recommendations to the 
Taiwan authorities.  This is the tenth year CNFI has conducted the 
annual survey.  CNFI sent questionnaires to 2,000 firms with 
investments in the PRC and received 304 replies between November 15 
and December 10, 2006. 
 
¶3.  Key characteristics of the 304 firms surveyed include: 
 
-- Investment Scale.  The number of firms with large-scale 
investment in the PRC was substantially higher than last year. 
Firms with total investment valued at more than US$20 million in the 
2006 survey accounted for 16.2 percent, compared to just 4.7 percent 
in 2005.  Firms with investment under US$5 million accounted for 
61.6 percent, down from 64.8 percent in 2005.  Firms with investment 
between US$5 and 10 million made up 12.5 percent, down from 20.8 
percent in 2005; and investments between US$10 and 20 million 
accounted for 9.8 percent of firms, virtually the same as the 9.7 
percent in 2005. 
 
-- Ownership Structure.  A higher percentage of firms surveyed had 
wholly-owned affiliates in the PRC at 79.2 percent in 2006 compared 
to 52.8 percent in 2005 and 71.8 percent 2004. 
 
-- Industry.  Non-high technology manufacturing industries accounted 
for 71.7 percent of firms surveyed; including rubber and plastics 
(17.8 percent), textiles and garments (11.9 percent), food and 
beverages (11.2 percent), and basic metals (6.9 percent).  High 
technology manufacturing accounted for 21.1 percent, including 
electronics and electrical appliance manufacturing (12.5 percent) 
and machinery and instrument manufacturing (8.6 percent).  Services 
accounted for 7.2 percent; including retail and wholesale trade (4.9 
percent), finance and insurance (1.3 percent), and science and 
technology services (1 percent).  Industry percentages were little 
changed from the previous year. 
 
¶4.  Survey results on local economic conditions in Mainland China 
include the following: 
 
-- Increasingly Focused on PRC Market.  The firms surveyed indicated 
that the domestic Chinese market accounted for 61.5 percent of total 
sales in 2006 up from 56.7 percent a year earlier.  The proportion 
of export sales back to Taiwan also rose from 5.4 percent in 2005 to 
7.4 percent last year.  Export sales to other areas dropped to 31.1 
percent in 2006 from 32.1 percent in 2005. 
 
-- Strong Local Competition.  Taiwan firms see Mainland local 
producers as their strongest competitors for the local market. 
Among the firms surveyed, 74.1 percent identified PRC enterprises as 
their main competitors.  Other major competitors included Hong Kong 
(identified by 15.5 percent of respondents), South Korean (15.2 
percent), U.S. (11.1 percent), and Japanese firms (10.8 percent). 
 
-- RMB Appreciation Not a Hindrance.  More than 85 percent of 
respondents to the survey expect the renminbi to appreciate against 
major international currencies in 2007.  The firms were asked how 
appreciation would affect the cost of raw materials, their export 
performance, domestic sales, and investment plans.  To each question 
a large majority of firms said appreciation of the renminbi would 
have a positive effect or no effect at all. 
 
¶5.  Survey findings on cross-Strait economic policies include the 
following: 
 
-- Direct Transportation Will Increase Investment in PRC.  More 
respondents indicated that they would increase their investment in 
China than in Taiwan if direct transportation links are implemented. 
 Of respondents, 45.9 percent said they would increase investment in 
the PRC, while only 23.2 percent said they would increase investment 
in Taiwan.  However, an even smaller percentage, just 11.3 percent, 
said they would reduce investment in Taiwan after direct links.  A 
large majority, 65.6 percent, said that direct links would have no 
 
TAIPEI 00000516  002 OF 002 
 
 
effect on plans to invest in Taiwan. 
 
-- Policy Recommendations Have Changed.  As in 2005, implementing 
"three links" was the cross-Strait policy suggestion supported by 
the highest percentage of respondents (75.7 percent in 2006 compared 
to 77.0 percent the previous year).  However, other priorities 
changed substantially.  The second highest priority was a 
cross-Strait investment protection agreement, supported by 47.7 
percent of respondents.  Such an agreement was just the ninth 
highest priority in 2005, supported by only 26.6 percent.  The third 
highest priority in 2006 was the establishment of official offices 
to assist in the resolution of commercial disputes.  The 
recommendation was supported by 46.1 percent.  In 2005, it was the 
eighth highest priority supported by 27.5 percent.  The second and 
third highest priorities in 2005 were regularizing cross-Strait 
charter flights and the establishment of schools in the PRC for 
children of Taiwan investors.  These fell to the fifth and ninth 
highest priorities, respectively.  The significant drop in support 
for these recommendations may be due in part to progress made in 
these areas during the last year. 
 
¶6. Comment: The annual CNFI survey is a useful opportunity to take 
the pulse of Taiwan's investors in the PRC.  This year's survey 
shows that some of the same trends of previous years continue. 
Rising scales of investment, more wholly-owned subsidiaries, 
increasing focus on the domestic PRC market, and other trends 
demonstrate that cross-Strait economic integration continues to 
deepen.