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R 310215Z OCT 07
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 6597
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UNCLAS SECTION 01 OF 02 GUANGZHOU 001180 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM AND EAP/TC 
 
E.O. 12958: N/A 
TAGS: EINV ETRD ELAB SENV TW CH
SUBJECT: Taiwan Investors Lament Changing Investment Environment in 
Pearl River Delta 
 
 
(U) THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED.  IT SHOULD NOT BE 
DISSEMINATED OUTSIDE U.S. GOVERNMENT CHANNELS OR IN ANY PUBLIC FORUM 
WITHOUT THE WRITTEN CONCURRENCE OF THE ORIGINATOR.  IT SHOULD NOT BE 
POSTED ON THE INTERNET. 
 
¶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 
 
GUANGZHOU 00001180  002 OF 002 
 
 
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