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UNCLAS SECTION 01 OF 03 GUANGZHOU 000269 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM AND EAP/TC 
 
E.O. 12958: N/A 
TAGS: PGOV PREL EINV ECON TW CH
SUBJECT: Lai Appointment Agitates Taiwan Investors in South China 
 
 
(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: Ma Ying-jeou's appointment of the Taiwan 
Solidarity Union's (TSU) Lai Shin-yuan as chair of the Mainland 
Affairs Council (MAC) has been as lively a topic of interest, 
positive and negative, among Taiwan businessmen in the Pearl River 
Delta as in Taiwan.  Close friends are divided.  Chang Han-wen, 
chair of China's National Taiwan Business Association (TBA), sees 
the appointment as a betrayal of KMT supporters, while Andrew Yeh, 
Chair of the Dongguan (TBA), says Ma needs Lai to put the brakes on 
other KMT leaders (Lien Chan and Chiang Pin-kung) who might be 
tempted to move too fast on cross-Strait opening.  Both business 
leaders look forward to the Straits Exchange Foundation (SEF) 
assuming an unofficial consular role in the mainland and providing 
assistance to Taiwan investors here.  They lamented worsening 
business conditions in the Pearl River Delta for Taiwan firms and 
the difficult decisions investors face, whether to move elsewhere in 
China, move to Southeast Asia, stay put and monitor the situation, 
or close up shop and go home.  They expect many factories to shut 
down and local industries to see consolidation.  End Summary. 
 
One Appointment, Different Interpretations 
------------------------------------------ 
 
¶2. (SBU) With hardly a nudge on our part, except to ask what's the 
latest news's from Taiwan, south China's Taiwan business leaders 
launched into a conversation (sometimes among themselves rather than 
with us) about the appointment of the Taiwan Solidarity Union's Lai 
Shin-yuan as chair of the Mainland Affairs Council (MAC).  While the 
chair of China's National Taiwan Business Association (TBA), Chang 
Han-wen, expressed profound disappointment, Andrew Yeh, the chair of 
the Dongguan Taiwan Business Association (China's largest), said he 
was optimistic that Lai's appointment would not impede progress on 
further opening of cross-Strait economic relations. 
 
¶3. (SBU) Chang, who owns a shoe factory in Dongguan and a couple of 
hotels in Shanghai and who has chaired the National TBA since it was 
founded in April 2007, criticized Ma for trying to please Taiwan's 
green party members instead of the seven million voters who 
supported him in the March 22 elections.  (Note: according to Chang, 
some 30,000 Taiwans from Dongguan had returned to Taiwan to vote for 
Ma - a startling and seemingly inflated figure.  End note.)  Chang 
told the Consul General that Kuomintang (KMT) Vice Chair Chiang 
Pin-kung had been with him when a Taiwan reporter called Chang to 
ask for comment on Lai's appointment.  He said Chiang, was startled, 
having not been apprised earlier of Lai's appointment.  Chang 
expects the appointment to make cross-Strait cooperation more 
difficult and possibly delay the implementation of weekend charter 
flights anticipated to begin on July 4. 
 
¶4. (SBU) Chang, who met Lai during a recent trip to Taipei, told us 
that she said as a member of Ma's administration she would follow a 
"one China" policy.  Chang was not entirely surprised that Ma chose 
to appoint a figure like Lai to head the MAC, commenting that Ma 
needed to demonstrate to green voters that he would not betray 
Taiwan.  He compared the appointment to Ma's decision to name 
Vincent Siew as his running mate, noting that many deep-blue KMT 
members dislike Siew. 
 
¶5. (SBU) Andrew Yeh, the chair of Dongguan's TBA, called Lai's 
appointment a practical move by Ma to balance power among internal 
KMT factions.  Ma, he said, needed to appoint Lai to check the 
influence of older KMT politicians who have been active in 
developing informal cross-Strait ties, especially Honorary Chair 
Lien Chan and Chiang Pin-kung.  He compared Lai to the brakes on a 
car that might otherwise go out of control.  In Yeh's view, Lien's 
trip to China after the KMT victory - and without notification of 
the president elect - had not bee respectful.  If Lai can restrain 
Lien, Ma will have nothing to fear from others in the KMT who might 
challenge his authority.  Yeh noted that Lai had already shown that 
she had the right personality to play bad cop for Ma.  However, even 
though he agrees with the strategy, he believes that Lai was not the 
right choice; her ethics and loyalty are clearly an issue. 
 
¶6. (SBU) Both Chang and Yeh emphasized that Ma will move cautiously 
on cross-Strait relations.  Chang explained that Ma prefers the 
status quo as do Taiwan investors in the mainland.  Yeh commented 
that Ma would not want to move too fast on cross-Strait opening in 
order to make sure he keeps some bargaining chips with Beijing. 
 
Great Expectations for the Straits Exchange Foundation 
--------------------------------------------- --------- 
 
 
GUANGZHOU 00000269  002 OF 003 
 
 
¶7. (SBU) The two business leaders are hopeful that the Straits 
Exchange Foundation (SEF) will take an active role in assisting 
Taiwan investors in China.  They anticipate that the SEF offices in 
China would be able to act as unofficial consulates.  Chang 
explained that investors now look to the TBAs to play that role, but 
with no official power the associations must rely on their 
connections to help investors resolve disputes.  Yeh believes that 
the semi-official status of SEF offices would make a big difference 
in protecting the interests of Taiwan businesses. 
 
¶8. (SBU) Chang expressed surprise that Ma had not appointed the 
KMT's Chang Rong-gong, who had worked closely with Chiang Pin-kung 
on cross-Strait issues, to be secretary general of the SEF.    Chang 
Han-wen attributed Ma's decision to appoint Chang Rong-gong to be 
deputy secretary general of the KMT instead to Ma's desire to limit 
Chiang's control of SEF. 
 
Dongguan's Economic Prospects Dim 
--------------------------------- 
 
¶9. (SBU) The investment environment for Taiwan firms in the Pearl 
River Delta, and especially in Dongguan, is deteriorating 
substantially, according both Chang and Yeh.  Chang noted that the 
number of Taiwan enterprises in Dongguan had fallen from 6,500 to 
5,000 recently due to rising costs and new government policies, 
namely the new Labor Contract Law, and new regulations governing 
export processing industries.  Yeh also highlighted the impact of 
renminbi (RMB) appreciation vis-a-vis the dollar, economic weakening 
in the United States due to the sub-prime mortgage crisis, and labor 
and energy shortages in the Pearl River Delta. 
 
¶10. (SBU) Chang argued that the Labor Contract Law has had the 
strongest impact on Taiwan investors.  He supports protection of 
workers' rights but pointed out that the law's details had not been 
spelled out.  According to Chang, unscrupulous attorneys have 
exaggerated the protections offered to workers by the law, for 
example telling them that they could get back overtime pay.  As a 
result, workers in many area factories had gone on strike.  Chang 
said workers in a factory just across the street and another nearby 
had gone on strike three days ago.  A month ago, a factory owned by 
the previous Dongguan TBA chair had been hit by a strike, and Taiwan 
media had reported that employees in another factory had rioted. 
However, Chang acknowledged that firms that had already strictly 
observed labor regulations, such as contract manufacturers for major 
international brands that were subject to regular inspections, had 
not seen much impact from the new law.  Yeh commented that firms in 
the Yangzi River Delta area, where the rule of law was somewhat 
stronger, had been less affected by the new law because the labor 
market was more tightly regulated there. 
 
¶11. (SBU) Chang also told us that a recent rumor about plans to 
reduce the population of Dongguan had disturbed Taiwan investors. 
According to the rumor, Guangdong Party Secretary Wang Yang had 
visited Dongguan and told Liu Zhigeng, the city's party secretary, 
that the per capita value-added output was too low.  Wang instructed 
Liu to reduce the Dongguan population by half.  Chang observed that 
many Taiwan firms would not be able to survive without Dongguan's 
large migrant labor population. 
 
Headed Toward Consolidation 
--------------------------- 
 
¶12. (SBU) The Chinese government aims to encourage labor-intensive 
firms in the Pearl River Delta region to move to other less 
developed parts of China, like Hunan and Jiangxi.  This will be 
difficult for Taiwan firms, according to Chang, who took note of 
relocation costs, increased transportation time and other expenses 
associated with inland areas.  In addition, investors fear that 
investment incentives and other favorable policies in these less 
developed areas won't last long. 
 
¶13. (SBU) Some firms are moving to Southeast Asian countries like 
Vietnam, Cambodia or Indonesia.  Yeh pointed out that investing in 
Vietnam was not really a viable solution for the export-processing 
industry's problems.  He argued that if a country of 1.3 billion 
couldn't provide an adequate labor pool, then a county of 80 million 
would certainly be unable as well. 
 
¶14. (SBU) Some firms, like Chang's, are staying put and watching the 
situation; others are closing down.  Chang said that even some of 
Dongguan's younger Taiwan investors are now more than 50 years old, 
and if the situation deteriorates, he predicts many of them will 
shut down their factories and return home.  Yeh foresees 
consolidation in the industry.  Survivors will gain market share, 
but the price of finished products will rise. 
 
 
GUANGZHOU 00000269  003 OF 003 
 
 
High-Tech Development Faces Challenges 
-------------------------------------- 
 
¶15. (SBU) Chang is not optimistic about the Pearl River Delta's 
potential to cultivate high-tech industries to replace 
labor-intensive ones forced out by changing conditions.  He noted 
that the Dongguan government had poured investment into the Songshan 
Lake High-Tech Park but had seen little success in attracting 
tenants.  High-tech industries rely on highly skilled workers, and 
Chang pointed out that those workers would prefer to live in eastern 
China, especially Shanghai.  The future was not particularly bright, 
Chang said, pointing to the fate of manufacturing cities in the 
United States that have struggled to transform. 
 
GOLDBERG