VZCZCXRO7321
RR RUEHCN RUEHGH RUEHVC
DE RUEHIN #0704/01 0870831
ZNR UUUUU ZZH
R 280831Z MAR 07
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 4646
INFO RUEHOO/CHINA POSTS COLLECTIVE
RHEFDIA/DIA WASHINGTON DC
RUEAIIA/CIA WASHDC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 TAIPEI 000704 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR 
STATE FOR EAP/TC 
COMMERCE FOR 3132/USFCS/OIO/EAP/WZARIT 
TREASURY FOR OASIA/LMOGHTADER 
USTR FOR STRATFORD, ALTBACH 
 
E.O. 12958: N/A 
TAGS: EINV ECON PREL CH TW
SUBJECT: CROSS-STRAIT INVESTMENT - PACE OF LIBERALIZATION 
HAS ACCELERATED 
 
REF: A. TAIPEI 490 
 
     ¶B. TAIPEI 25 
     ¶C. 06 TAIPEI 4164 
     ¶D. 06 TAIPEI 1584 
     ¶E. 06 TAIPEI 1487 
     ¶F. 06 TAIPEI 1481 
     ¶G. 05 TAIPEI 4938 
 
¶1. (SBU) Summary: Taiwan has liberalized restrictions on 
investment in the PRC at a more rapid pace in 2006 after 
several years of little progress.  This contributed to a 
27 percent rise in approved China-bound investment last 
year.  However, capital limits and industry-specific 
restrictions remain in place, holding back some of 
Taiwan's most competitive firms.  End summary. 
 
Cross-Strait Opening Reaccelerates 
---------------------------------- 
 
¶2. (U) Taiwan's efforts to lift restrictions on 
investment in the PRC appear to have accelerated again in 
that last year after several years of slow progress. 
Major liberalization measures since 2000 include the 
following: 
 
--November 7, 2001 - Firms permitted to invest directly 
in the PRC without routing investment through a third 
territory. 
 
--January 1, 2002 - Investment ban lifted on 122 
categories of information technology and consumer 
electronic manufacturing, including PCs and mobile phones. 
Investment regulations simplified and ban lifted on 
investment projects valued at more than US$50 million. 
 
--March 29, 2002 - Taiwan semiconductor manufacturers 
permitted to build plants in China that make chips with 
0.25-micron feature size on eight-inch wafers. 
 
--April 26, 2002 - Investment ban lifted for additional 
industry categories, raising the number of permitted 
categories to 8,162 or 93 percent of all industrial 
categories. 
 
--August 12, 2002 - Investment ban lifted for 68 new 
categories of service industries, including civil 
aviation, real estate brokerage, insurance, construction, 
and retail sales. 
 
--February 14, 2005 - Ban lifted on investment in 
securities firms in the PRC. 
 
--April 27, 2006 - Ban lifted on investment in 
semiconductor packaging and testing services using less- 
advanced technologies.  In addition, thin-film transistor 
liquid crystal display (TFT-LCD) manufacturers permitted 
to make small-sized panels in the Mainland. 
 
--November 2, 2006 - Taiwan Tobacco and Wine Corp. 
becomes first Taiwan fully state-owned enterprise 
permitted to establish a representative office in China. 
 
--December 14, 2006 - Semiconductor manufacturing 
investment applications approved for ProMOS Technologies 
and Powerchip Semiconductor Corporation, two of Taiwan's 
leading dynamic random access memory (DRAM) producers. 
The applications had been submitted to the Ministry of 
Economic Affairs two years earlier. 
 
--December 29, 2006 - Investment permitted in 
semiconductor manufacturing using 0.18-micron technology. 
 
Signs of Impact 
--------------- 
 
¶3. (U) The effects of the Chen administration's 
liberalization measures of the past year are readily 
apparent.  Approved investment in China rose 27 percent 
in 2006 to US$7.64 billion after declining for two 
straight years.  In December, investment was more than 
four times higher than the same month a year ago.  This 
 
TAIPEI 00000704  002 OF 003 
 
 
was due primarily to the approval of the ProMOS plan to 
build a semiconductor fab in Chongqing at a cost of 
US$365 million.  In addition, Advanced Semiconductor 
Engineering (ASE), a semiconductor packaging and testing 
firm, was approved in December to buy a PRC packaging and 
testing firm for US$60 million (ref C).  More recently, 
Taiwan Semiconductor Manufacturing Corporation (TSMC) was 
approved on March 20 to upgrade its plant in Songjiang, 
China, to 0.18-micron technology, the first company to 
receive approval from Taiwan under the reforms announced 
in late December. 
 
¶4. (U) Ministry of Economic Affairs (MOEA) figures for 
Taiwan's total approved investment in the PRC are 
provided below in US$ billion: 
 
            Approved     Percentage 
Year         Amount        Growth 
----         ------        ------ 
2001          2.78           6.8 
2002          6.72         141.5 
2003          7.70          14.5 
2004          6.94          -9.8 
2005          6.01         -13.5 
2006          7.64          27.7 
 
Note: On April 24, 2002, Taiwan announced an amnesty for 
investment in China made without MOEA approval. 
Investment totals for 2002 and 2003 include investment 
from previous years approved under the amnesty.  These 
cases accounted for US$2.86 billion in 2002 and US$3.10 
billion in 2003.  End note. 
 
40 Percent Limit Still in Place 
------------------------------- 
 
¶5. (U) Nevertheless, important restrictions on Taiwan 
investment in the Mainland remain in place.  One of the 
most controversial is a capital ceiling on investment 
often referred to as the 40 percent rule.  The 
restriction is actually a graduated set of percentage 
limits based on a firm's total paid-in capital.  Firms 
with total capital below NTD 5 billion (about USD 150 
million) may invest up to NTD 80 million (USD 2.4 million) 
or 40 percent of total capital whichever is higher. 
Firms with total capital between NTD 5 billion and NTD 10 
billion (USD 300 million) may invest 40 percent of NTD 5 
billion plus 30 percent of the firm's capital over NTD 5 
billion.  Firms with total capital in excess of NTD 10 
billion may additionally invest 20 percent of the amount 
over NTD 10 billion. 
 
¶6. (U) Estimates vary of the number of firms affected by 
the 40 percent limit.  One example often cited by 
industry analysts is Uni-President, Taiwan's largest food 
conglomerate.  It has vast, diversified holdings in 
Taiwan that include more than 4,000 Seven-Eleven outlets. 
According to media reports, it has invested approximately 
US$350 million in China where it is now the number two 
brand food group (ref E).  However, because Uni-President 
has reached the investment capital limit, it has sought 
alternative means to further expand its presence in China. 
It has used profits from its existing units in China to 
fund further investment.  It has also reportedly sought 
private equity partners who would finance acquisitions in 
China that would be managed by Uni-President.  In 
addition, the group has considered listing its China 
operations separately on the Hong Kong Stock Exchange. 
 
Industry-Specific Restrictions Also Persist 
------------------------------------------- 
 
¶7. (U) Taiwan also maintains numerous industry-specific 
restrictions, especially for technology-intensive 
industries.  Only investment in less advanced 
technologies has been opened for TFT-LCD panel 
manufacturers and semiconductor packaging and testing 
firms.  Investment in integrated circuit (IC) design 
facilities is not permitted.  (Note: Taiwan IC design 
firms are permitted to open customer service and sales 
centers in China.  Industry observers speculate that many 
 
TAIPEI 00000704  003 OF 003 
 
 
of these facilities also illegally engage in design 
engineering work as reported ref D.  End note.) 
Semiconductor manufacturing investment was liberalized in 
December to allow investment using 0.18-micron technology, 
but Taiwan firms have already begun lobbying for 
liberalization of more advanced technology.  TSMC 
Chairman Morris Chang, who represented Taiwan President 
Chen Shui-bian at the last APEC leaders meeting in 
Vietnam, called on the Taiwan authorities to allow 
investment in more advanced technology after Intel 
announced it would build a plant in Dalian, China, using 
90-nanometer technology, two generations more advanced 
that what Taiwan permits.  High-tech industry leaders 
have repeatedly argued that the restrictions give their 
Chinese and international competitors an advantage in the 
world's fastest growing semiconductor market. 
 
¶8. (U) Investment restrictions also persist for some 
capital-intensive industries.  Taiwan forbids its 
petrochemical companies from building naptha cracker 
facilities, which would cost billions of dollars, in 
China.  Formosa Petrochemicals, which already exports 
more than half of it petrochemical output from Taiwan to 
China, is eager to expand with a naptha cracker facility 
in Ningbo, China (ref A).  In addition, Taiwan banks are 
not permitted to establish branches or buy subsidiary 
banks in the Mainland.  Many Taiwan banks see Mainland 
China as their natural market for expansion because of an 
existing customer base among Taiwan investors operating 
there (ref G).  Several have already established 
representative offices in China.  One, Taipei Fubon Bank, 
purchased a Hong Kong bank in part as a potential 
platform for expansion in the PRC. 
 
Comment - Moving Faster but the Journey's Not Over 
--------------------------------------------- ----- 
 
¶9. (SBU) Taiwan's record of liberalization of cross- 
Strait investment restrictions has improved considerably 
in the last year.  Under Premier Su Tseng-chang, the 
Democratic Progressive Party (DPP) administration has 
made some politically difficult choices that show a 
genuine commitment to progress in this area.  However, 
Taiwan's economy will benefit more from even faster and 
more aggressive opening.  The restrictions that remain 
continue to hold back Taiwan's most competitive firms 
from realizing their ambitious goals for the greater 
China market. 
WANG